Systematic Scenario Selection: Stress Testing and the Nature of Uncertainty

Quantitative Finance

In their article for Quantitative Finance, Dr. George Korenko, a partner at Edgeworth Economics, and co-author Mark Flood of the U.S. Department of the Treasury’s Office of Financial Research present an efficient and systematic methodology for selecting multiple well distributed scenarios (or shocks) for stress testing applications for elliptically distributed multivariate risk factors. Their methodology systematically enforces internal consistency among each shock by sampling points of selected severity from a plausible joint probability distribution.



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