QFRC Occasional Lecture:Stressed Correlations and Volatilities
Christoph Becker
Frankfurt School of Finance & Management
Wolfgang M. Schmidt
Frankfurt School of Finance & Management
March 9, 2011
Presenter: Christoph Becker
Abstract:
We propose a new approach to define stress scenarios for volatilities and correlations which fulfills the requirements of the Basel Committee on Banking Supervision for quantifying market risk. Correlations and volatilities are functions of one and the same market factor, which is the key to stress them in a consistent and intuitive way. Our approach is based on a new asset price model where correlations and volatilities depend on the current state of the market. The state of the market captures market-wide movements in equity prices and thereby fulfills minimum requirements for risk factors stated by the Basel Committee. For sample portfolios we compare correlations and volatilities in a normal market and under stress and explore consequences on value-at-risk. Stressed value-at-risk exceeds the standard value-at-risk by a factor of 3 to 4, confirming estimates from the Basel Committee. We finally compare our modeling approach with multivariate GARCH models. For all data analyzed our model turned out to be superior in capturing the dynamics of volatilities and correlations.
Complimentary light refreshments Available
- Date:
- 30 June 2011
- Time:
- 12:00 - 13:00
- Location:
- City - Haymarket CB05D CM05D.02.19
- Audience:
- All Welcome
- Cost:
- FREE
- RSVP:
- RSVP for Catering
- Contact:
- Caroline Dobson
- URL:
- Map