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