Financial Econometrics and Empirical Market Microstructure
Adaptive Stress Testing Visualizations
Visualization is a crucial component to Adaptive Stress Testing. Visualization draws attention on emerging risks, and can help build intuition on how different risks are interconnected.
We can use heatmaps to prioritize attention to escalating high probability scenarios (red) and then escalating lower probability scenarios (Fig. 19).
Risk managers will focus first on the imminent threats, or escalating high PStress scenarios. Escalating low PStress scenarios are emerging scenarios, and still offer the potential for exerting control through proactive risk management. Black Swans could be lurking underneath stable low PStress scenarios, which calls for harnessing social intelligence to probe deeper into hidden fault lines.
We can also use network graphs to visualize emerging risk themes. Network graphs are a great way to build intuition about how interrelationships are changing over time, and we will show some examples of such graphs follows.
|
|
12 Network Stress Testing in Practice
Network approaches are very effective for designing comprehensive stress scenarios. For example, consider the partial correlations stress testing methodology developed by FNA, which shows how stress scenarios are likely to cascade through a network. Partial correlations measure pairwise correlations between two random variables, taking out the effect of other variables.
