A Coherent Framework for Stress-testing
Author | : Jeremy Berkowitz |
Publisher | : |
Total Pages | : 14 |
Release | : 1999 |
ISBN-10 | : OCLC:1290406792 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book A Coherent Framework for Stress-testing written by Jeremy Berkowitz and published by . This book was released on 1999 with total page 14 pages. Available in PDF, EPUB and Kindle. Book excerpt: In recent months and years practitioners and regulators have embraced the idea of supplementing VaR estimates with stress-testing. Risk managers are beginning to place an emphasis and expend resources on developing more and better stress-tests. In the present paper, we hold the standard approach to stress-testing up to a critical light. The current practice is to stress-test outside the basic risk model. Such an approach yields two sets of forecasts -- one from the stress-tests and one from the basic model. The stress scenarios, conducted outside the model, are never explicitly assigned probabilities. As such, there is no guidance as to the importance or relevance of the results of stress-tests. Moreover, how to combine the two forecasts into a usable risk metric is not known. Instead, we suggest folding the stress-tests into the risk model, thereby requiring all scenarios to be assigned probabilities.