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Integrating Stress Scenarios into Risk Quantification Models

33 Pages Posted: 19 Jun 2011 Last revised: 23 Apr 2014

Azamat Abdymomunov

Federal Reserve Banks - Federal Reserve Bank of Richmond

Sharon K. Blei

Fedral Reserve Bank of Richmond

Bakhodir Ergashev

EY

Date Written: June 20, 2011

Abstract

We enhance the method of integrating scenarios proposed in Ergashev (2012) into risk models. In particular, we provide additional theoretical insights of the method with focus on stress testing Value-at-Risk models. We extend the application of the method, which is originally proposed for scenario analysis in the operational risk context, to market and credit risks. We provide detailed application guidance of the method for market, credit, and operational risks. The method (i) ensures that a stressed model produces a higher risk estimate than the model based on historical data only and (ii) does not require assumptions on stressed loss distributions, thereby simplifying the scenario generation process.

Keywords: Stress test, Scenarios, VaR, Interest rate risk, Operational risk, Credit risk

JEL Classification: G32, G21, G20

Suggested Citation

Abdymomunov, Azamat and Blei, Sharon K. and Ergashev, Bakhodir, Integrating Stress Scenarios into Risk Quantification Models (June 20, 2011). Available at SSRN: https://ssrn.com/abstract=1867365 or http://dx.doi.org/10.2139/ssrn.1867365

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

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