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A Short Guide to Managing Risk in Worst Case Scenarios
Year Of Publication: 2007
Month Of Publication: September
Pages: 14
Download Count: 47
View Count: 1776
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 10-17-2010
Publisher: Administrator
Summary
Stress tests have emerged as an important complement to Value at
Risk. The usefulness of analysing portfolio behaviour in stress scenarios is only ensured (1) if the scenarios considered are not too implausible and (2) if no plausible scenarios are missed in which the portfolio is more dangerous than in the scenarios considered. These two requirements are satisfied when among all scenarios above some plausibility threshold those scenarios are identified in which the portfolio suffers the most severe loss. Plausibility of scenarios is measured in a dimension-independent way by the Mahalanobis distance. The location of the worst case scenario indicates the key risk factors of the portfolio. This information can be used to construct risk mitigating positions which reduce worst case losses deemed unacceptable.
Author(s)
Breuer, Thomas Sign in to follow this author
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