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Stressing correlations and volatilities — A consistent modeling approach

  • Becker, Christoph
  • Schmidt, Wolfgang M.
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    We propose a new approach to the definition of stress scenarios for volatilities and correlations. Correlations and volatilities depend on a common market factor, which is the key to stressing them in a consistent and intuitive way. Our approach is based on a new asset price model where correlations and volatilities depend on the current state of the market, which captures market-wide movements in equity-prices. For sample portfolios we compare correlations and volatilities in a normal market and under stress and explore consequences for value-at-risk.

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    File URL: http://www.sciencedirect.com/science/article/pii/S092753981200093X
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    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 21 (2013)
    Issue (Month): C ()
    Pages: 174-194

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    Handle: RePEc:eee:empfin:v:21:y:2013:i:c:p:174-194
    Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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