This is a lunchtime presentation hosted by CFA Ireland and MSCI Barra. Refreshments and sandwiches will be available from 12.30. The presentation by Oleg Ruban will begin at 13.00 and finish by 13.50.

 

 

Description of Presentation: In recent years, stress testing has moved into the mainstream of risk management practice. In our recent survey of risk management practices, we found that institutional investors consider it to be a valuable part of the risk management toolkit.. The development of comprehensive stress-testing programs is also encouraged (and in some cases required) by the regulators. Nevertheless, systematization of stress testing and integration with portfolio construction and other risk management practices has been lacking. In this presentation we outline a framework for the integration of stress testing in the investment process. There are four main steps in our framework: (1) selecting a severe, but plausible scenario (2) selecting the appropriate factors to shock (3) transmitting the shock to the portfolio and (4) constructing “event safe” portfolios based on the results of the stress test.  We also outline a framework for formalizing the process of reverse stress testing in the context of a fundamental factor model. Our methodology for constructing “event safe” portfolios is illustrated for the case of a global government bond portfolio.