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Best Practices for Predictive Stress Tests in RiskManager and BarraOne

A predictive stress test based on historical data can be a valuable tool in contemplating large market shocks. When the degree of extrapolation becomes excessive, or the prediction is based on a tenuous historical correlation, the predictive stress test can lead to unintuitive results that do not conform to reasonable market and economic expectations. This Research Insight offers best practices for users of RiskManager and BarraOne who want to design stress tests with correlated factors; these guideline will help users conduct stress tests that generate realistic and intuitive results.