Stress testing interest-rate-dependent positions using portfolio-specific scenarios

Paweł Rokita , Radosław Pietrzyk

Abstract

This article presents a proposal of an approach to stress testing of interest-rate-dependent portfolios. Stress-test scenarios are suited here to the structure of the portfolio. In this way, severity of a scenario may be increased as compared to standard methods. Scenarios are constructed on the basis of the information about portfolio sensitivity. When constructing a scenario, the direction of changes to selected nodes (vertices) of the interest-rate term structure is determined by the signs of partial sensitivity measures with respect to these nodes. Positive shifts are imposed where the sensitivity is negative and negative ones – where the sensitivity is positive. The shifts themselves are not more extreme than the ones that are used in the industrystandard stress scenarios. The approach is analyzed by an example of a portfolio of positions in IRS contracts. Then, profits or losses obtained under the proposed scenarios are compared with the results of 9 standard stress tests. For the test portfolio, it the proposed scenarios are severe indeed, but two standard ones (parallel downward shift of the whole term structure and a combination of historical minima) came out to be even more severe in this particular case.
Author Paweł Rokita (MISaF / IZF / KIFiZR)
Paweł Rokita,,
- Katedra Inwestycji Finansowych i Zarządzania Ryzykiem
, Radosław Pietrzyk (MISaF / IZF / KIFiZR)
Radosław Pietrzyk,,
- Katedra Inwestycji Finansowych i Zarządzania Ryzykiem
Pages1488-1497
Publication size in sheets0.5
Book Loster Tomas, Pavelka Tomas (eds.): The 12th International Days of Statistics and Economics : Conference Proceedings, 2018, MELANDRIUM, ISBN 9788087990148, 2063 p.
Keywords in Englishstress testing, stress scenario, yield curve, PV01
URL https://msed.vse.cz/msed_2018/article/110-Mazurek-Szymon-paper.pdf
Languageen angielski
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Rokita_Pietrzyk_Stress_Testing_Interest_Rate_Dependent.pdf 672,96 KB
Score (nominal)15
Score sourceconferenceIndex
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