Stress-Testing Portfolio-Specific Risk
Journal of Investment Management (JOIM), Fourth Quarter 2013
Posted: 15 Nov 2014
Date Written: 2014
We establish a relationship between the idiosyncratic risk of portfolios and a parsimonious group of market variables. Because we are able to summarize idiosyncratic risk with this small group of variables, we are able to design stress-tests that describe portfolio-specific risks as market variables change. These stress tests provide portfolio managers with important information that cannot be gleaned from standard volatility forecasts.
Keywords: Portfolio idiosyncratic risks, stress-test, market variables
JEL Classification: G00
Suggested Citation: Suggested Citation