Abstract

http://ssrn.com/abstract=1867365
 
 

References (11)



 


 



Worst-Case Scenarios as a Stress Testing Tool for Risk Models


Azamat Abdymomunov


Federal Reserve Banks - Federal Reserve Bank of Richmond

Sharon K. Blei


Fedral Reserve Bank of Richmond

Bakhodir Ergashev


Federal Reserve Banks - Federal Reserve Bank of Richmond

June 20, 2011


Abstract:     
We propose a new approach to stress testing risk models of financial institutions. In this approach, a scenario is fully defined by the frequency of scenario occurrence and lower bound of anticipated loss severity. All available scenarios are ordered by their frequency and severity to identify worst-case scenarios and only worst-case scenarios augment the loss distribution in a risk model. By doing that, we ensure that while the information in all scenarios is considered, only those that negatively affect the tail of the loss distribution are taken into account for the purpose of stress testing the risk model. The proposed approach has several advantages: (i) it has a built-in feature which ensures that a stressed risk model cannot produce a risk estimate that is lower than the one derived from the historical data based model; (ii) it does not require assumptions on scenario loss distributions, thereby simplifying the scenario generation process; and (iii) the approach can be applied to various types of risk, such as market or operational risk.

Number of Pages in PDF File: 23

working papers series


Download This Paper

Date posted: June 19, 2011 ; Last revised: June 28, 2011

Suggested Citation

Abdymomunov, Azamat and Blei, Sharon K. and Ergashev, Bakhodir, Worst-Case Scenarios as a Stress Testing Tool for Risk Models (June 20, 2011). Available at SSRN: http://ssrn.com/abstract=1867365 or http://dx.doi.org/10.2139/ssrn.1867365

Contact Information

Azamat Abdymomunov
Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )
P.O. Box 27622
Richmond, VA 23261
United States
Sharon K. Blei
Fedral Reserve Bank of Richmond ( email )
P.O. Box 27622
Richmond, VA 23261
United States
Bakhodir Ergashev (Contact Author)
Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )
P.O. Box 30248
Charlotte, NC 28230
United States
704-358-2514 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 1,616
Downloads: 348
Download Rank: 45,801
References:  11
People who downloaded this paper also downloaded:
1. Stress Testing Banks
By Til Schuermann

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.547 seconds