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Market Risk Stress Testing For Internationally Active Financial Institutions

Author

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  • Petar Marković
  • Branko Urošević

Abstract

The paper develops a comprehensive framework for market risk stress testing in internationally active financial institutions. We begin by defining the scope and type of the stress test and explaining how to select risk factors and the stress time horizon. We then address challenges related to data gathering, followed by in-depth discussion of techniques for developing realistic shock scenarios. Next the process of shock application to a particular portfolio is described, followed by determination of portfolio profit and loss. We conclude by briefly discussing the issue of assigning probability to stress scenarios. We illustrate the framework by considering the development of a ‘worst case’ scenario using global financial market data from Thomson Reuters Datastream.

Suggested Citation

  • Petar Marković & Branko Urošević, 2011. "Market Risk Stress Testing For Internationally Active Financial Institutions," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 56(188), pages 62-90, January –.
    • Handle: RePEc:beo:journl:v:56:y:2011:i:188:p:62-90
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    References listed on IDEAS

    as
    1. Quagliariello,Mario (ed.), 2009. "Stress-testing the Banking System," Cambridge Books, Cambridge University Press, number 9780521767309, January.
    2. Christoffersen, Peter, 2011. "Elements of Financial Risk Management," Elsevier Monographs, Elsevier, edition 2, number 9780123744487.
    3. Miloš Božović & Branko Urošević & Boško Živković, 2009. "On The Spillover Of Exchangerate Risk Into Default Risk," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 54(183), pages 32-55, October -.
    4. Bank for International Settlements, 2005. "Stress testing at major financial institutions: survey results and practice," CGFS Papers, Bank for International Settlements, number 24.
    5. Ingo Fender & Michael S. Gibson & Patricia C. Mosser, 2001. "An international survey of stress tests," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 7(Nov).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Xingxing Ye & Raphaël Douady, 2019. "Risk and Financial Management Article Systemic Risk Indicators Based on Nonlinear PolyModel," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02488592, HAL.
    2. Xingxing Ye & Raphael Douady, 2018. "Systemic Risk Indicators Based on Nonlinear PolyModel," JRFM, MDPI, vol. 12(1), pages 1-24, December.

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    More about this item

    Keywords

    stress testing; risk factors; scenario analysis; shock development; data gathering; stressing correlations; stressing interest rates; PnL calculation; stress scenario probability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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