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Research Seminar Series in Statistics and Mathematics

WU (Vienna University of Economics and Business) , Departments 4 D4.4.008 09:00 - 10:30

Type Lecture / discussion
LanguageEnglish
Speaker Natalie Packham (Department of Business and Economics, Berlin School of Economics and Law)
Organizer Institute Statistik und Mathematik
Contact katrin.artner@wu.ac.at

Natalie Packham (Department of Business and Economics, Berlin School of Economics and Law) about "Correlation stress testing of stock and credit portfolios"

The Institute for Statistics and Mathematics (Department of Finance, Accounting and Statistics) cordially invites everyone interested to attend the talks in our Research Seminar Series, where internationally renowned scholars from leading universities present and discuss their (working) papers.

No registration required.

The list of talks for the winter term 2019/20 is available via the following link: https://www.wu.ac.at/en/statmath/resseminar

Abstract:
We develop a general approach for stress testing correlations in stock and credit portfolios. Using Bayesian variable selection methods, we build a sparse factor structure, linking individual names or stocks with country and industry factors. Based on methods from modelling correlations in interest rate modelling, especially in the context of market models, we calibrate a parametric correlation matrix, where correlations of stocks / names are represented as a function of the country and industry factors. Economically meaningful stress scenarios on the factors can then be translated into stressed correlations. The method also lends itself as a reverse stress testing framework: using e.g. the Mahalanobis distance on the joint risk factor distribution, allows to infer worst-​case correlation scenarios. In a previous related paper (https://doi.org/10.1016/j.jbankfin.2019.01.020), we developed a specific correlation stress model to analyse a USD 6.2 bn loss by JP Morgan in 2012 (known as the "London Whale").

Joint work with Fabian Woebbeking.



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