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Developing a stress testing framework based on market risk models
Company: Journal of Banking and Finance
Year Of Publication: 2008
Month Of Publication: October
Pages: 2220–2236
Download Count: 64
View Count: 2161
Comment Num: 0
Language: English
Who Can Read: Free
Date: 5-29-2010
Publisher: Administrator
Summary
The Basel 2 Accord requires regulatory capital to cover stress tests, yet no coherent and objective framework for stress testing portfolios
exists. We propose a new methodology for stress testing in the context of market risk models that can incorporate both volatility
clustering and heavy tails. Empirical results compare the performance of eight risk models with four possible conditional and unconditional
return distributions over different rolling estimation periods. When applied to major currency pairs using daily data spanning more
than 20 years we find that stress test results should have little impact on current levels of foreign exchange regulatory capital.
(volume 32, number 10)
Author(s)
Alexander, Carol Sign in to follow this author
Sheedy, Elizabeth Sign in to follow this author
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