Correlation scenarios and correlation stress testing

Arbeitspapier

We develop a general approach for stress testing correlations of financial asset portfolios. The correlation matrix of asset returns is specified in a parametric form, where correlations are represented as a function of risk factors, such as country and industry factors. A sparse factor structure linking assets and risk factors is built using Bayesian variable selection methods. Regular calibration yields a joint distribution of economically meaningful stress scenarios of the factors. As such, the method also lends itself as a reverse stress testing framework: using the Mahalanobis distance or highest density regions (HDR) on the joint risk factor distribution allows to infer worst-case correlation scenarios. We give examples of stress tests on a large portfolio of European and North American stocks.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: IRTG 1792 Discussion Paper ; No. 2021-012

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Portfolio Choice; Investment Decisions ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Thema: Correlation stress testing ; reverse stress testing ; factor selection ; scenario selection ; Bayesian variable selection ; market risk management

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Packham, Natalie ; Woebbeking, Fabian
• Ereignis: Veröffentlichung
• (wer): Humboldt-Universität zu Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series"
• (wo): Berlin
• (wann): 2021

Weitere Informationen

• Handle: http://hdl.handle.net/10419/235866
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ