Amplification Mechanisms Dr ive Systemic Risk
A stress event is a systemic breakdown, which is a form of phase transition. We observe phase transitions in all complex systems. Phase transitions are triggered after a critical point …
Do Risk Limits Add Value?
According to the Wall Street adage, one of the best ways to make money is not to lose it. The importance of binding and enforceable internal limits has long been …
Stress-Testing Model for Corporate Borrower Portfolios
Vladimir Seleznev, Denis Surzhko, and Nikolay Khovanskiy Abstract Despite the significant attention to the stress-testing issues in finances world-wide, the ways of quantitative assessment of the stress impact on the …
Rating Comparisons in the Literature
Among the first papers aimed to compare the ratings of different agencies was the one by Beattie and Searle (1992). Long-term credit ratings were gathered from 12 international credit rating …
The Destabilizing Effect of Stability
Hyman Minsky’s “Financial Instability Hypothesis” (1992) is often summarized as “stability breeds instability.” As Lawrence H. Meyer observed in Lessons from the Asian Crisis (1999): “a period of stability induces …
Problem Statement
Following Brodsky et al. (2009), the problem of structural break detection could be formulated through nonparametric estimation of copulas applied to time series. In contrast to the original paper, this …
. The Risk Factors Evolution Model
To describe this evolution, the following AR(1)-GARCH(1,1) model (Posedel 2005) is applied for each risk factor: rt = д C mr,_i + £ £t = atS, a,2 = ! C …
Simulation Results
Our numerical simulation includes the GM model, first-stage modification (the market-maker’s uncertainty about real asset value) and second-stage modification (simultaneous uncertainty of the market-maker and the informed trader about real …
Japan Case Study
We’ll use a recent Japan stress test case study to illustrate how this would work. As a consequence of massive quantitative easing, Japanese equities and bonds entered an exceptional bull …
Global Risk Factor Index
There are many indices of solar and geomagnetic activity, e. g., Wolf numbers, indices aa, am, Kp, Dst, AE etc. The objective was to choose the best indicator for adequate …
Market Shocks: Review of Studies
Mariya Frolova Abstract This paper gives a brief description of the current state of research on market shocks, presents its main results and denotes problems researchers are faced with. We …
Adaptive Stress Testing Framework
This model of systemic crises leads us to propose our Adaptive Stress Testing framework, which is driven by the integration of top-down and bottom-up perspectives: I. Macro: Identify potential risks …
Integrating Stop-Loss Limits into VaR Limits
The idea of accounting for the traders’ P&L over a specific period in the available exposure limit is developed by Beeck et al. (1999) for a single equity position in …
Modification of the Vasicek Model
We propose one of possible implementations of stress-testing for the credit portfolios of corporate borrowers (further—the Model), which is based on Monte-Carlo simulations and the modified Vasicek model (Vasicek 1987). …
Evidence of Microstructure Variables’ Nonlinear Dynamics from Noised High-Frequency Data
Nikolay Andreev and Victor Lapshin Abstract Research of nonlinear dynamics of finance series has been widely discussed in literature since the 1980s with chaos theory as the theoretical background. Chaos …
Dynamic of the Rating Agencies Activities in Russia
The growth of the number of Russian agencies ratings has been significant in recent years. Four Russian rating agencies achieved registration in the Russian Ministry of Finance as well as …
Volatility is not Risk
When asking investors whether they would prefer high or low volatility investments, most opt for low. Few can tolerate the turbulence of volatility. But low volatility only means low visible …
The Results of Evaluation on Generated Data
A suggested method of detecting and estimation of structural breaks in a time series was used on a generated time series with a specified pattern of dependence. For analysis we …
The Risk Factor Interrelation Model
The dependence structure of risk factors was described by a t-copula (Genest et al. 2009). Copulas were used instead of the well-known Pearson’s linear correlation because the latter one has …
On the Modeling of Financial Time Series
Aleksey Kutergin and Vladimir Filimonov Abstract This paper discusses issues related to modeling of financial time series. We discuss so-called empirical “stylized facts” of real price time-series and the evolution …
AIG Case Study Using FNA HeavyTails™ Outlier Monitor
FNA’s recently launched HeavyTails application is network implementation of the Adaptive Stress Testing framework. The initial focus of HeavyTails is to monitor global market outliers.[25] AIG’s collapse during the U. …
Industry Specifics of Global Risk Factor Exposure
The industry specifics of preconditions for error proliferation includes, among other things: (1) the scope of error impact on business processes (with a higher labor productivity, an error of one …
Price Formation Mechanism
The aim to understand the price formation mechanism is not novel. It is well known that price process of any financial instrument follows a stochastic-like path: a price path can …
Building an Adaptive Stress Library
This insight that market intelligence is not evenly distributed drives the design of our Adaptive Stress Library to harness intelligence from Innovators and Early Adopters. Innovators foresee potential risks that …
Setting VaR Limits Based on Portfolio Insurance and Quantile Hedging
These drawbacks are addressed in a dynamic model proposed by StraBberger (2002). In this model, the market risk of a stock portfolio[36] is managed through VaR limits in a continuous …
Monte-Carlo Simulation Schema
One of the key requirements for the stress-testing model is the ability to estimate changes in the rating structure of the portfolio over time. The most obvious approach for this …
Smoothing Data for Further Analysis and Preliminary Observations
In this work several microstructure variables were researched, including • Stock return and price • Price change and its absolute value • Spread and relative spread (ratio of spread to …
Comparison of Ratings: Methods and Algorithms
The rating process has some problems, such as • A relatively small number of updated communicative ratings. • Difficulties of comparison of estimation between different rating agencies. • Absence of …
Macro Micro Polarity Management
As discussed above, the flux between immediate visible risks and longer term fragilities presents a perpetual challenge. It’s not a problem that can be solved with better statistical models. Indeed, …
Examples of Using the Test
It is worth noting that, in general, the result may significantly affect the use of data in levels or differences, since levels and differences often correspond to different levels of …
General Scheme of the Model Workflow
The model workflow includes the following steps: 1. The AR(1)-GARCH(1,1) model estimation of each risk-factor (i. e. returns on each stock). 2. Distribution construction for historical St (the stochastic component …
Stylized Facts
Though the empirical analysis of asset price time series has been performed for more than half a century, only the development of computerized trading in 1980s allowed to record enough …
AQAL Risk Management
We’ll apply Integral Theory philosopher Ken Wilber’s All Quadrant All Levels (AQAL) Framework to put the major components of Adaptive Stress Testing in a larger context (Wilber 2001). Integral refers …
Geographical Specifics of Global Risk Factor Exposure
The geographical specifics of global risk factor exposure are related to the distance of the region where the main business process or asset (if appropriate) is located from the magnetic …
Origins of Market Shocks
It is still not clear what the main source of price jumps is. Price jumps, understood as an abrupt price change over a very short time, are also related to …
