VaR Stress Testing for Two-Stage Transmission Stress Events
Resource
Taiwan Academy of Management Journal 2 (2): 21-38
Journal
Taiwan Academy of Management Journal
Journal Volume
2
Journal Issue
2
Pages
21-38
Date Issued
2002
Date
2002
Author(s)
Abstract
In this paper we use the two-stage conditional probability distributions to compute a new loss exposure measure for stress events that may have two-stage sequential impacts on various markets. The price changes in two-stage transmission could possibly be found in economies where foreign indirect investment plays a prominent role in the domestic financial markets. We test the conjecture of two-stage transmission by applying the new technique to the historical data of Taiwan. The simulated results show that the proposed loss exposure measure improves upon the over- or under-estimation biases commonly found in stress testing conducted by financial institutions in their VaR calculations.
SDGs
Type
journal article