Stress testing and systemic risk measures using multivariate conditional probability

Tomaso Aste

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arXiv · 2004.06420

Stress testing and systemic risk measures using multivariate conditional probability

Tomaso Aste

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Abstract

The multivariate conditional probability distribution models the effects of a set of variables onto the statistical properties of another set of variables. In the study of systemic risk in a financial system, the multivariate conditional probability distribution can be used for stress-testing by quantifying the propagation of losses from a set of `stressing' variables to another set of `stressed' variables. In this paper I describe how to compute such conditional probability distributions for the vast family of multivariate elliptical distributions, and in particular for the multivariate Student-t and the multivariate Normal distributions. Measures of stress impact and systemic risk are proposed. An application to the US equity market illustrates the potentials of this approach.

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Tomaso Aste. 2020-04-14. Stress testing and systemic risk measures using multivariate conditional probability. https://arxiv.org/abs/2004.06420

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