How to link macro-economic scenarios to risk drivers

Original by Moody's, 2014Hamster_gagarin_linkedin
hamster writter This summary note was posted on 8 April 2016, by in Finance Stress Testing #, #

Webinar on demand, Moody’s Analytics, September 2014, Accessed March 2015

  • Can use 3 ways:
    1. Stress PD directly by correlating PD with macro data without going into the drivers. Correlate the model with economic drivers, don’t need to know what is driving it. Quicker. Use continuous time variables. Can also model PD through the default rate (but data is then aggregated)
    2. Stress drivers and get the PD: Analyze drivers and change them accordingly, correlation with the economy. Use cross section multivariate approach
    3. Migration process: use non Markovian approach with matrices
  • EDF=Expected default frequency
  • The use of static or dynamic depends on the quality of the portfolio