VaR Stress Testing

 VaR and Stress Testing 

There is a thing called VAR in the financial industry. Actually, this means two things. It means variance, it means amount of risk, but the truth is third, vector autoregression.

I just thought it would be confusing. Therefore, the variance of data collection is defined as a measure of its variability. In finance, some people use the relatively new term VAR to mean "value at risk". It didn't happen until after the 1987 recession. As such, it is a measure used by some financiers to evaluate investment or portfolio risk in terms of money rather than probability and time.

For example, if you say 1%, $10 million one-year VaR, that means the portfolio has a 1% chance of losing $10 million in one year. There is also a risk measurement method that has become popular in recent years, especially after the 2007-09 financial crisis, and this is the stress test. Now, stress testing dates back to the 1960s, and that means if your doctor is worried about your mood, he'll put you on the treadmill at a medical center and ask you to do some tests. An EKG will be attached to you and they will look at your heart while you are in the stress of running. But now time has found the way to money. In fact, the Federal Reserve Bank did the stress analysis of Fannie and Freddie before the 2008 crisis.

It doesn't work Both companies failed, but they kept trying. So the stress test illustrates this idea. It's not a simple statistical concept, it's a measure. It is a way of assessing the risk of a company or portfolio.

The idea of ​​stress testing is that it allows us to look at the data not only because of its historical return and how much has changed, but also to look at the content of the information and ask what the risk is for various financial problems. Because. in fact, a stress test is a test usually commissioned by the government to see how some companies will respond to the financial crisis. 

The Dodd-Frank Act of 2010 in the United States requires the Federal Reserve to conduct annual stress tests on non-bank financial institutions it controls.

I think they're already doing that to banks and they want the Fed to offer at least three different economic terms. 

What they will do is they will get information from companies about all their connections with other organizations, everything they have, how safe it is, and then they will think about what would happen or what would happen if there was a big market, for example. what happens if the dollar falls or rises or there is short-term liquidity Lean and short-term debt capital dries up fast. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act became federal law on July 21, 2010, in response to the 2007-2008 financial crisis. This bill is the most important reform in America.

Financial management since the regulatory reforms that followed the Great Depression. Dodd-Frank doesn't specify what the three different states are, but they say there must be at least three. So that's a different story. This is a scenario analysis. 

The European Banking Authority, created after the 2011 financial crisis, also regularly inspects European banks. Countries like the UK and China are now running stress tests, but the question is, are they effective?

More and more people do not believe they can predict what will happen in the next crisis. Anat Admati, a professor at Stanford University, always thought this was nonsense. You can't do that. These people are trying to predict what will happen to these companies when there is a financial crisis, they just don't have the imagination and understanding of how things work out of fear and fear of money and he thinks they are worthless. Generally speaking, the results of the stress test are not harmful, so don't worry.

In fact, if you read OFHEO's report on stress assessment, they say there are still some concerns. You know, they're protecting it, but they're actually saying don't worry, so OFHEO is over. The government shut it down. So the question is, can we do it this time? Therefore, Anat Admati does not believe we can do it this time.

He felt greater anxiety. The stress test didn't show any issues, but it's not clear now. If I were the CEO of a company, I think I would request a stress test and do it internally, but you don't want it to be public. What if the result is not good? Look, the thing is, if you publish information, every other company that will do business with you will be worried about it, so they don't want to do business with you.

So it looks like your reputation is at stake. So, if the government asks you to disclose information about the stress test, you have every reason to try to clean it up. So the question is whether regulators are sufficiently motivated to demand and enforce. The Dodd-Frank Act gave the regulator, the Financial Conduct Authority, the right to go there and request information from companies. But I think it is difficult for him.

In the real world, it's a war. They don't want to tell you.

Follow us for more informative blogs!