Tuesday, August 9, 2011

VaR and Stress Testing

Stress Testing is the study of the effects on the valuation of a portfolio of a specified set of changes in risk factors resulting from exceptional but plausible events. This is a procedure to create stress tests, through stress tests that can be varied in nature. And said historical scenarios, that is to say based on past experience, can rub shoulders with hypothetical scenarios said, that is to say based on events deemed possible in the future knowing that any changes of macroeconomic factors , sociological or political. To stress tests can also be added sensitivity tests, the best known is to increase or degrade instantly settings of a risk / multiple degrees or in percentage terms.

Scenario building and testing should follow an iterative and collaborative approach. Indeed, the convergence of views of all stakeholders, whether financial (risk managers ...) or not (economists, business ...), is needed to reach a consensus and identify all the factors (economic, environmental, commercial ...) that would influence the risk parameters. The analysis then produced by stress testing, primarily intended for risk managers and the Directorate General of the institution, and should be a detailed analysis to understand the exposure of the bank. This team approach then facilitates the production process of risk management indicators (dashboards) and ownership of findings by the top management.