The Impact of Stress Scenarios on VaR and Expected Shortfall

15 Pages Posted: 8 Feb 2008

See all articles by Sanjay Basu

Sanjay Basu

National Institute of Bank Management

Date Written: December 2006

Abstract

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

Basu, Sanjay, The Impact of Stress Scenarios on VaR and Expected Shortfall (December 2006). Available at SSRN: https://ssrn.com/abstract=1091462 or http://dx.doi.org/10.2139/ssrn.1091462

Sanjay Basu (Contact Author)

National Institute of Bank Management ( email )

Kondhwe Khurd, NIBM P.O.
Pune, WY Maharashtra 411048
India

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