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Stress Testing of Energy-Related Derivative Instruments Based on Conditional Market Risk Models
Year Of Publication: 2010
Month Of Publication: September
Pages: 24
Download Count: 14
View Count: 1532
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 6-9-2011
Publisher: Administrator
Summary
Stress testing has recently been an important risk management tool to both complement and supplement risk measurement methods under different stress scenarios. It is already a part of Basel II capital rules introduced by the Basel Committee on Banking Supervision. This paper performs thorough backtests under widely used risk models in combination with different conditional volatility frameworks to identify the most suitable risk model specification for structured energy instruments mostly traded in financial markets and conducts a stress test based on the specified models. We find strong evidence that, for a smaller estimation window, the volatility model that incorporates asymmetric volatility response together with Student’s t innovations clearly outperforms symmetric ones. However, the conditional empirical model is superior when larger estimation windows are considered. Also, it is shown that the backtest performances of volatility models are substantially affected by the distribution selection. Stress test results clearly indicate that energy shocks can lead greater stress losses than those observed in major currency pairs. Ass
Author(s)
Kücüközmen, C. Coskun Sign in to follow this author
Aydin, Nadi Serhan Sign in to follow this author
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