Thomas Breuer (Research Centre PPE, Fachhochschule Vorarlberg) Martin Jandacka (Research Centre PPE, Fachhochschule Vorarlberg) Klaus Rheinberger (Research Centre PPE, Fachhochschule Vorarlberg) Martin Summer (Oesterreichische Nationalbank)
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We give a precise operational definition to three requirements the Basel Committee on Banking Supervision specifies for stress tests: plausibility and severity of stress scenarios as well as suggestiveness of risk-reducing actions. The basic idea of our approach is to define a suitable region of plausibility in terms of the risk-factor distribution and search systematically for the scenario with the worst portfolio loss over this region. One key innovation compared with the existing literature is the solution of two open problems. We suggest a measure of plausibility that is not prone to the problem of dimensional dependence of maximum loss and we derive a way to consistently deal with situations where some but not all risk factors are stressed. We show that setting the nonstressed risk factors to their conditional expected value given the value of the stressed risk factors maximizes plausibility among the various approaches used in the literature.
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Volume (Year): 5 (2009) Issue (Month): 3 (September) Pages: 205-224 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure G20 - Financial Economics - - Financial Institutions and Services - - - General C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
M. Hashem Pesaran & Til Schuermann & Bjorn-Jakob Treutler, 2007.
"Global Business Cycles and Credit Risk,"
NBER Chapters,
in: The Risks of Financial Institutions, pages 419-474
National Bureau of Economic Research, Inc.
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