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How to find plausible, severe, and useful stress scenarios

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  • Thomas Breuer

    ()
    (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.)

  • Martin Jandacka

    ()
    (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.)

  • Klaus Rheinberger

    ()
    (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.)

  • Martin Summer

    ()
    (Oesterreichische Nationalbank, Economic Studies Division)

Abstract

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 worst portfolio loss over this region. One key innovation compared to 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. Among the various approaches used for partial scenarios, plausibility is maximised by setting the non stressed risk factors to their conditional expected value given the value of the stressed risk factors.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Working-Papers/2009/Working-Paper-150/fullversion/wp150_tcm16-97771.pdf
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Bibliographic Info

Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 150.

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Length: 29
Date of creation: 05 Feb 2009
Date of revision:
Handle: RePEc:onb:oenbwp:150

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Keywords: Stress testing; maximum loss; risk management; banking regulation.;

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  1. Dées, Stéphane & di Mauro, Filippo & Pesaran, Hashem & Smith, Vanessa, 2005. "Exploring the international linkages of the euro area: a global VAR analysis," Working Paper Series 0568, European Central Bank.
  2. M. Hashem Pesaran & Til Schuermann & Björn-Jakob Treutler, 2005. "Global Business Cycles and Credit Risk," NBER Working Papers 11493, National Bureau of Economic Research, Inc.
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