What are the key forward looking risk measures necessary to perform effective risk analysis on a multi-asset portfolio?
In the last post, we briefly described VaR Analysis. Here the focus will be on ‘Stress Testing that includes ‘Sensitivity and Scenario’ analysis along with What-If analysis using the portfolio re-valuation technique.
Change to portfolio value for changes to one or more risk factors affecting the portfolio’s securities, usually for a single time period.
Single factor sensitivity incorporates changes to a single risk factor, and the change to multiple risk factors is a hypothetical composite sensitivity scenario.
e.g. For Fixed Income portfolio – we can conduct yield curve shift analysis or for equity – index/asset price changes. And combining multiple factors, such as FX changes, yield curve shift, volatility changes all in one set can be one composite sensitivity scenario.
Results here include changes to VaR/Value of the portfolio before and after the scenario.
They are of two main types –
Historical Stress Event Scenario
— A popular must have for most risk analysts and regulators. This calculation involves calculating changes to portfolio value for a given historical scenario – e.g.: A ‘COVID-19 historical scenario’ can be setup with beginning and end date as Dec-01-2020 to Mar-31-2021 respectively. Change in portfolio value with current position holdings for the above scenario is the stress scenario result.
These changes, when calculated at security level and grouped by country/currency/sector, can provide additional valuable information in the analysis
Historical Scenario VaR
This involves using current holdings and calculating VaR for a historical date to analyze the changes in VaR/Value from the current to historical date.
– Ability to analyze changes in VaR/Value to changes in portfolio holdings in real-time
Portfolio Risk Analysis using the above approach with no batch loading of holdings and related data can help risk managers assess portfolio impact in real-time.
Combining results from above analysis data with real-time performance data provides users a ‘complete’ picture of the portfolio’s current state.
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