Developing a stress testing framework based on market risk models | Macquarie University ResearchOnline

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Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/74207

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Title: Developing a stress testing framework based on market risk models
Related: Journal of banking and finance, Vol. 32, Issue 10, p.2220-2236
DOI: 10.1016/j.jbankfin.2007.12.041
Publisher: Elsevier
Date: 2008
FoR/RFCD Code(s): 010200 Applied Mathematics 150200 Banking, Finance and Investment
Author/Creator: Alexander, Carol
Author/Creator: Sheedy, Elizabeth
Description: The Basel 2 Accord requires regulatory capital to cover stress tests, yet no coherent and objective framework for stress testing portfolios exists. We propose a new methodology for stress testing in the context of market risk models that can incorporate both volatility clustering and heavy tails. Empirical results compare the performance of eight risk models with four possible conditional and unconditional return distributions over different rolling estimation periods. When applied to major currency pairs using daily data spanning more than 20 years we find that stress test results should have little impact on current levels of foreign exchange regulatory capital.
Description: 17 page(s)
Subject Keyword: 010200 Applied Mathematics
Subject Keyword: 150200 Banking, Finance and Investment
Subject Keyword: value-at-risk models
Subject Keyword: stress testing
Subject Keyword: market risk
Subject Keyword: exchange rates
Subject Keyword: GARCH
Resource Type: journal article
Organisation: Macquarie University. Applied Finance Centre

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