Risk Managers: How to Create Great Stress Tests (and How to Not)Daniel Satchkov
Risk managers are increasingly tasked with creation of forward looking stress tests. The problem that many encounter is that results are not reasonable, especially when they combine shocks to different factors, such as interest rates and equity indices or spreads and commodities. We show the most important source of such problem, disregard for the relative volatility of different factors being shocked. Shock Plausibility measure helps avoid this problem by quantifying coherence based on past crises.
Risk Managers: How to Create Great Stress Tests (and How to Not)Daniel Satchkov
Risk managers are increasingly tasked with creation of forward looking stress tests. The problem that many encounter is that results are not reasonable, especially when they combine shocks to different factors, such as interest rates and equity indices or spreads and commodities. We show the most important source of such problem, disregard for the relative volatility of different factors being shocked. Shock Plausibility measure helps avoid this problem by quantifying coherence based on past crises.
