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Stress testing and systemic risk measures using multivariate conditional probability

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  • Tomaso Aste

Abstract

The multivariate conditional probability distribution models the effects of a set of variables onto the statistical properties of another set of variables. In the study of systemic risk in a financial system, the multivariate conditional probability distribution can be used for stress-testing by quantifying the propagation of losses from a set of `stressing' variables to another set of `stressed' variables. In this paper I describe how to compute such conditional probability distributions for the vast family of multivariate elliptical distributions, and in particular for the multivariate Student-t and the multivariate Normal distributions. Measures of stress impact and systemic risk are proposed. An application to the US equity market illustrates the potentials of this approach.

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  • Tomaso Aste, 2020. "Stress testing and systemic risk measures using multivariate conditional probability," Papers 2004.06420, arXiv.org, revised May 2021.
    • Handle: RePEc:arx:papers:2004.06420
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    References listed on IDEAS

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