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Working Paper
Designing Market Shock Scenarios
We propose an approach for generating financial market scenarios for stress testing financial firms' market risk exposures. This approach can be used by industry practitioners and regulators for their stress scenario design. Our approach attempts to maximize risk capture with a relatively small number of scenarios. A single scenario could miss potential vulnerabilities, while stress tests using a large number of scenarios could be operationally costly. The approach has two components. First, we model relationships among market risk factors to set scenario shock magnitudes consistently across ...