A systematic approach to multi-period stress testing of portfolio credit risk

Thomas Breuer, Martin Jandačka, Javier Mencia () and Martin Summer

Journal of Banking & Finance, 2012, vol. 36, issue 2, 332-340

Abstract: We propose a new method for analysing multi-period stress scenarios for portfolio credit risk more systematically than in current macro stress tests. The plausibility of a scenario is quantified by its distance from an average scenario. For a given level of plausibility, we search systematically for the most adverse scenario. This ensures that no plausible scenario will be missed. We show how this method can be applied to some models already in use by practitioners. While worst case search requires numerical optimisation we show that we can work with reasonably good linear approximations to the portfolio loss function. This makes systematic multi-period stress testing computationally efficient and easy to implement. Applying our approach to data from the Spanish loan register we show that, compared to standard stress test procedures, our method identifies more harmful scenarios that are equally plausible.

Keywords: Stress testing; Credit risk; Worst case search; Maximum loss (search for similar items in EconPapers)
JEL-codes: C15 G20 G28 G32 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Working Paper: A systematic approach to multi-period stress testing of portfolio credit risk (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:2:p:332-340

DOI: 10.1016/j.jbankfin.2011.07.009

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