Stress testing and VaR Mapping

[afterworkguinness]

Hi,
"Describe how mapping of risk factors can support stress testing". How is the method described here a stress test ?

According to Jorian 11.2.2 we perform the cash flow mapping, calculating a returns VaR for each of the terms, reduce the value of the "zero" for each term by the VaR and then we see that the portfolio value is the same as the undiversified VaR calculated in the cash flow mapping by summing the returns VaR for each term .

What are we stressing ?

 

[ShaktiRathore]

Hi
Here we are totally foregoing the effects of diversification which shall give the undiversified Var for the portfolio and undiversified Var is stressed form of Var that is we have stressed the portfolio by considering separate Vars and reducing benefits of diversification which shall give a higher value of Var. Stress the portfolio to the level that diversification dissapears and see the resulting Var. This stress test checks the worst scenario where diversification dissapears and calculate resulting Var.
Thanks

 

[afterworkguinness]

Thanks for clearing that up.