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Systematic Stress Tests with Entropic Plausibility Constraints
Company: Journal of Banking and Finance
Company Url: Click here to open
Year Of Publication: 2012
Month Of Publication: April
Resource Link: Click here to open
Download Count: 0
View Count: 1370
Comment Num: 0
Language: English
Source: article
Who Can Read: Free
Date: 5-23-2012
Publisher: Administrator
Summary
Stress tests with handpicked scenarios might misrepresent risks either because dangerous scenarios are not considered or because the scenarios considered are too implausible. To overcome these two pitfalls we propose a systematic search for the worst case within a relative entropy ball of sufficiently plausible scenarios. For this purpose we use mixed scenarios, which are risk factor distributions rather than realisations. A Maximum Loss theorem explicitly gives the worst case distribution. The method is illustrated in a number of example applications: linear and quadratic portfolios, stressed default probabilities, stressed correlations, macroeconomic stress tests.
Author(s)
Breuer, Thomas Sign in to follow this author
Csiszár, Imre Sign in to follow this author
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