CPD Events

Correlation Stress Testing of Stock and Credit Portfolios

03 Mar 2021

About the event

We develop a general approach for stress testing correlations in stock and credit portfolios. Using Bayesian variable selection methods; we build a sparse factor structure; linking individual names or stocks with country and industry factors. Based on methods from modelling correlations in interest rate modelling; especially in the context of market models; we calibrate a parametric correlation matrix; where correlations of stocks / names are represented as a function of the country and industry factors. Economically meaningful stress scenarios on the factors can then be translated into stressed correlations. The method also lends itself as a reverse tress testing framework: using e.g. the Mahalanobis distance on the joint risk factor distribution; allows to infer worst-case correlation scenarios. We give examples of stress tests including an application to analyse a USD 6.2 bn loss by JP Morgan in 2012; known as the “London Whale”. (This is joint work with Fabian Woebbeking)

CPD Provider

Fitch Learning

Fitch Learning

Fitch Learning

Part of the Fitch Group, Fitch Learning partners with clients to enhance knowledge, skills and conduct. With centers in London, New York, Chicago, Singapore, Dubai and Hong Kong, we are committed to questioning and understanding client needs across the globe and on the ground locally. Our people advise and build learning solutions to accelerate the achievements of the individual and the company, across the entire employee lifestyle. Our courses cover a wide range of financial topics across ten sectors: • Corporate Credit Analysis • Bank Analysis • Insurance Company Analysis • Corporate Finance • Risk Management in Financial Institutions • Structured Finance & Securitization • Non-Bank Financial Institutions • Modeling & Excel • Capital Markets & Investment • Professional Skills Fitch Learning also offers customized, in-house training to meet your specific requirements. We work with our clients to define your needs and work in partnership with you to deliver truly blended, innovative solutions. Our extensive expertise and global teams mean that we can deliver across a range of industries and subject matter.

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