Abstract
The sensitivity measure we encountered in the previous chapter gives us price impacts of individual, small risk factor changes; it mainly provides comparability of exposures across risk factors. To gauge the impact of simultaneous and large changes to several risk factors at once, we reprice our positions under custom-made scenarios—this is called stress testing.
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Notes
- 1.
Compare, e.g., the PnL impact of a 2% interest rate change to twice the PnL impact of a 1% change—they differ:
$$\displaystyle \begin{aligned} e^{-(r+2\%)} - e^{-r} \neq 2(e^{-(r+1\%)} - e^{-r}) . \end{aligned}$$
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Auer, M. (2018). Stress Tests. In: Hands-On Value-at-Risk and Expected Shortfall. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-319-72320-4_6
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DOI: https://doi.org/10.1007/978-3-319-72320-4_6
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Online ISBN: 978-3-319-72320-4
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