Dear Daria,

*Regarding your query " I am not specifically referring to capital stress
testing, but stress testing of any portfolio for any underlying factors. I
know about standard market risk stress test (yield curve shifts, delta
changes in prices, etc.) "..........*

I understand that here you are talking about stress testing for market risk
, which is addressed under Internal Model approach of Pillar 1 of Basel
II. A better  way I think is to approach it as  a framework rather a
model-based one.

You may break it as below :

1. Purpose  ( whether  Risk Factor Based  i.e.market risk, credit risk,
combination of  two or more etc., Risk Silo Based  i.e.yield curve risk,
default risk etc., or, Instruments Based i.e. Future, Options etc.)

2. Selection of Methodology ( Whether  scenerio analysis, factor push,
maximum loss optimisation etc)

Then you can make your implementation.


*Regarding your query "but I was wondering if there is more than that,
particularly including liquidity and credit risk exposure"....*

Regarding stressing testing for Pillar 2, as I referred before that balance
sheet is to be stressed. When we are stressing the balance sheet, basically
we are stressing the asset class mapped with its line items and as such
stressing the exposure level data. We simulate it n number of times using
the specified routines for each risk factors. Simulation could  be of a
single risk factor or a combination of multiple risk factors.
Then recomputation can be done. Regarding your query as to credit risk
exposure, yes it addresses. If we use credit migration matrix for stress
testing,  under stressed condition there is common tendency for a migration
towards default, and migrating to lower grade of rating means attracting
greater credit risk  and as such stressed exposure level data shall shall
have greater credit risk exposure. Further, regarding your query for
liquidity risk, yes it also addresses. After stressing there shall be a
significant reduction in the value of asset side and if you match it with
liabilities in ALM perspective in appropriate maturity buckets, there shall
be cumulative gaps. This causes liquidity risk, which is also captured by
this stress testing.

Actually, I am writing codes for both Pillar 1 stress testing and Pillar 2
strest testing in R. These two approaches are completely different in its
application and methodologies. If you like, please feel free to interact
with me. This would be a good learning for me.

Kind Regards,
Debashis



On 14/07/2008, Dario Nicodemi <dario.nicodemi@proximaalfa.com> wrote:
>
>  Dear Debashis.
>
>
>
> I am noot specifically referring to capital stress testing, but stress
> testing of any portfolio for any underlying factors. I know about standard
> market risk stress test (yield curve shifts, delta changes in prices, etc.)
> but I was wondering if there is more than that, particularly including
> liquidity and credit risk exposure.
>
>
>
> Many thanks
>
>
> Dario
>
>
>
>
>
>
>
> +++++++++++++++++++++++++
> Dario Nicodemi
>
> *próxima -* Próxima Alfa Investments SGIIC, S.A.
> Paseo de la Castellana, 15 1º B
> 28046 Madrid - Spain
> Phone: (+34) 917 900 569
>
> E-Mail: Dario.Nicodemi@proximaalfa.com
>
>
>  ------------------------------
>
> *From:* Debashis Dutta [mailto:dutt.debashis@gmail.com]
> *Sent:* viernes, 11 de julio de 2008 20:18
> *To:* Dario Nicodemi
> *Cc:* r-sig-finance@stat.math.ethz.ch
> *Subject:* Re: [R-SIG-Finance] Stress Testing
>
>
>
> Dear Daria,
>
>
>
> Pls let me know which sress testing you are referring to? Is this (1) the
> stress testing  for Internal Model Approach of Pillar 1 of  Basel II , or
> (2) Stress testing for additional buffer risk capital requirement under
> Pillar 2 of Basel II.
>
>
>
> Whereas the first stress testing relates to testing the adequacy of
> VaR-based risk capital   generating different stressed scenerio changing
> correlation and others , the second one aims at finding what is the addition
> risk capital requirement (in addition to pillar I regulatory risk capital)
> for unexpected losses under stressed scenerios  where its reates to the
> balance sheet.
>
>
>
> After you let me which stress testing you  rrefer here, then I can provide
> you resources.
>
>
>
> Kind Regards,
>
> Debashis
>
>
>
> On 11/07/2008, *Dario Nicodemi* <dario.nicodemi@proximaalfa.com> wrote:
>
> Dear All,
>
> First of all, apologies if this is not the write place to post this
> request. I was looking for some material related to Stress Testing
> (packages, books, articles).
>
> Any suggestions will be appreciated.
>
> Kind regards
>
> Dario
>
>
>
>
>
>
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