A Framework for Market, Credit and Transfer Risk Aggregation and Stress Testing

64 Pages Posted: 17 May 2012 Last revised: 8 May 2014

Multiple version iconThere are 2 versions of this paper

Date Written: May 8, 2014

Abstract

A framework which consistently and fully integrates market, credit and country transfer risks of a general portfolio of financial assets in a multi-period setup is developed. An appropriate definition of exposure, loss-given-defaults and loss-given-transfer-events provides a unified treatment of these three risk types. Implementable algorithms are presented as well as a comparison with the industry standards and best practices. The framework discussed is generic and does not explicitly depend on the choice of the scenario generator. Generic and macroeconomical stress tests is directly obtained by selecting the paths for which the relevant risk factors are constrained by a priori given bounds.

Keywords: Stress testing, risk management, integration of market and credit risk

JEL Classification: C00, G00

Suggested Citation

Farinelli, Simone, A Framework for Market, Credit and Transfer Risk Aggregation and Stress Testing (May 8, 2014). Available at SSRN: https://ssrn.com/abstract=2060855 or http://dx.doi.org/10.2139/ssrn.2060855

Simone Farinelli (Contact Author)

Core Dynamics GmbH ( email )

Scheuzerstrasse 43
Zurich, 8006
Switzerland

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