Abstract
Attempting to put meaningful numbers to portfolio risks is always challenging. Conventional risk measures are often considered not to fully capture all risks inherent in a portfolio, particularly under difficult market conditions. Under such conditions, stress-testing against significant historical market events, or using invented scenarios may help identify and quantify risks within a portfolio. Stress tests also help reassure a portfolio or risk manager as to how a portfolio might respond to specific market outcomes or other concerns.
This paper introduces stress-testing a portfolio of conventional assets against market risks using historical and artificial scenarios. It includes a definition of stress-testing and a classification to aid ongoing discussions, as well as thoughts on practical implementation. Four stress-testing methodologies are explored: two ‘historical’ stress tests and two ‘hypothetical’ stress tests. Examples illustrate key concepts, drawing out strengths and weaknesses of the stress tests, which are then discussed with recommendations.
This paper introduces stress-testing a portfolio of conventional assets against market risks using historical and artificial scenarios. It includes a definition of stress-testing and a classification to aid ongoing discussions, as well as thoughts on practical implementation. Four stress-testing methodologies are explored: two ‘historical’ stress tests and two ‘hypothetical’ stress tests. Examples illustrate key concepts, drawing out strengths and weaknesses of the stress tests, which are then discussed with recommendations.
| Original language | English |
|---|---|
| Pages | 2-7 |
| Number of pages | 6 |
| No. | 7 |
| Specialist publication | Review of financial markets |
| Publisher | CISI |
| Publication status | Published - 1 Sept 2015 |
| Externally published | Yes |
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)