9

135-150

16

 

John Wiley & Sons, Inc. (Visit publisher website)

2002

English

 

 

 

Basic

 

 

Stress testing, scenario construction, predictive stress test, broken arrow stress test, stressed VaR, portfolio specific stress tests

 

Shortcomings of value at risk include the lack of information about the magnitude of potential losses beyond the value at risk and the lack of information about the direction of the risk exposure. Stress testing helps reduce these shortcomings. Although there is no standard way to stress test a portfolio, this chapter outlines the process of stress testing and highlights the strengths and weaknesses of various approaches including using past market events, using market factor shocks, and defining stress scenarios. The chapter also discusses the issue of increased correlations during large market events and how this property can be included in stress testing.

 

9.1 Constructing stress scenarios
9.2 Using actual past market events
9.3 Applying assumed shocks to market factors: zero-out stress scenarios
9.4 Applying assumed shocks to market factors: anticipatory stress scenarios
9.5 Predicitve anticipatory stress scenarios
9.6 Anticipatory stress scenarios with "stress" correlations
9.7 Stressing value-at-risk estimates
9.8 Stressing factors left out of the model
9.9 Portfolio-specific stress tests
9.10 Other issues in designing good stress tests
9.11 Notes

 

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*** From the publisher ***
Covers the hottest topic in investment for multitrillion pension market and institutional investors.
Institutional investors and fund managers understand they must take risks to generate superior investment returns, but the question is how much. Enter the concept of risk budgeting, using quantitative risks measurements, including VaR, to solve the problem. VaR, or value at risk, is a concept first introduced by bank dealers to establish parameters for their market short-term risk exposure. This book introduces VaR, extreme VaR, and stress-testing risk measurement techniques to major institutional investors, and shows them how they can implement formal risk budgeting to more efficiently manage their investment portfolios. Risk Budgeting is the most sophisticated and advanced read on the subject out there in the market.