A framework for market, credit and transfer risk aggregation and stress testing

Simone Farinelli

Journal of Credit Risk

Abstract: ABSTRACT In this paper, a framework that consistently and fully integrates the market, credit and;country transfer risks of a general portfolio of financial assets in a multi-period setup;is developed. An appropriate definition of exposure, loss given default and loss given;transfer events provides a unified treatment of these three risk types. Implementable;algorithms are presented, as is a comparison with industry standards and best practices.;The framework discussed is generic and does not explicitly depend on the choice of;the scenario generator. Generic and macroeconomic stress tests are directly obtained;by selecting the paths for which the relevant risk factors are constrained by a priori;given bounds.

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