The Impact of Stress Scenarios on VaR and Expected Shortfall
15 Pages Posted: 8 Feb 2008
Date Written: December 2006
In the wake of Basel II, stress tests are recommended by most central banks, for their supervisory review process. However, most of these tests fail to consider the probability of occurrence of the shocks. Using data on USD-INR and GBP-INR between January 2000 and February 2001, we couch stress testing in a probabilistic, Value-at-Risk (VaR), framework. This allows us to estimate the impact of stress scenarios on VaR and Expected Shortfall under Variance-Covariance and Historical Simulation. Our analysis also tells us how sensitive VaR and Expected Shortfall are to these shocks.
Keywords: Extreme Losses,Volatility, Correlation, Normality, Simulation
JEL Classification: G21, G32
Suggested Citation: Suggested Citation