Stress testing incorporating causal dependency [28]

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Bullet points include: Top down Select broad ‘macro’ events of relevance to the economy (e.g. unemployment up), political landscape (e.g. Middle East crisis) or the like Identify impact on portfolio, typically via hypothesised causal links (e.g. a Bayesian net or methodologies used in e.g. national security planning) Macro events often have ambiguous financial market outcomes Bottom up Identify portfolio vulnerabilities, e.g. concentrations, relative positions, leverage Stress portfolios around their ‘pressure points’ to the desired level of severity May work better for trading portfolios, as their positions may be ‘subtle’ but large, so unclear impact on them of say changing economic conditions

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