Developing a stress testing framework based on …

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Developing a stress testing framework based on market risk modelsqCarol Alexander, Elizabeth Sheedy*ICMA Centre, University of Reading, Box 242, Reading RG6 6BA, UKMacquarie Applied Finance Centre, Macquarie University, Sydney, AustraliaReceived 29 May 2007; accepted 31 December 2007Available online 15 January 2008AbstractThe Basel 2 Accord requires regulatory capital to cover stress tests, yet no coherent and objective framework for stress testing port-folios exists. We propose a new methodology for stress testing in the context of market risk models that can incorporate both volatilityclustering and heavy tails.

Developing a stress testing framework based on market risk modelsq Carol Alexander, Elizabeth Sheedy* ICMA Centre, University of Reading, P.O. Box 242, Reading RG6 6BA, UK

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