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Stress Tests: From Arts to Science
Year Of Publication: 2010
Month Of Publication: September
Pages: 29
Download Count: 78
View Count: 1739
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 10-17-2010
Publisher: Administrator
Summary
Stress tests with handpicked scenarios might misrepresent risks either
because the scenarios considered are too implausible or because
some dangerous scenarios are not considered. Systematic search for
the worst case within some set of plausible scenarios is introduced to
overcome these two pitfalls. For arbitrary loss functions we determine
explicitly the worst case scenario over Kullback-Leibler spheres
of plausible scenarios. Practical implementations of this method do
not require any numerical optimisation. The method is illustrated
in a number of example applications: linear and quadratic portfolios,
stressed credit default probabilities, stressed rating transition correlations.
Author(s)
Breuer, Thomas Sign in to follow this author
Csiszár, Imre Sign in to follow this author
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