Systematic Multi-period Stress Scenarios

Alan de Genaro (FEA-USP and CETIP)

Abstract: The 2008 global financial crisis produced the most serious recession since the Great Depression in the 1930s and a significant number of financial institutions were rescued by means of federal government bailouts. After the turmoil ended, regulators in different jurisdictions laid the foundation of new regulatory standards aiming at strengthening systemic resilience. One of the most prominent measures was the adoption of supervisory stress tests for establishing minimum capital standards. Whereas stress testing is an important risk management tool it is inherently challenging for a number of reasons.

First, it requires specifying one or more scenarios that are stressful but not implausibly disastrous. Scenarios must have certain elements of realism, but are certainly ahistorical, and may represent structural breaks in the processes that are being stressed. This short course, based on the recent article by De Genaro (2016) presents a quantitative framework for generating multi-period stress scenarios, which address some of issues raised above.

Reference:

De Genaro, A. (2016). Systematic multi-period stress scenarios with an application to CCP risk management. Journal of Banking and Finance 67, 119-134.