Stress testing incorporating causal dependency [4]

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Bullet points include: VaR and other typical quantitative risk measures depend on association E.g. suppose the problem has three variables. VaR then ultimately depends on the joint probability distribution of the three variables irrespective of why the joint distribution has arisen, i.e. its causation We have previously focused on stress testing because the ‘why’ might influence consequences and/or the best risk mitigating strategies to adopt In this session we will also focus on stress testing because the ‘why’ might also allow us to estimate the joint probability distribution and hence VaR etc better Highlights the importance of prior views as per Kemp (2010)

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