PDF | I present a new approach to stress testing that combines the elicitation of subjective (marginal or By so doing, stress events are placed in an approximate but coherent. ideas introduced for stress testing in Rebonato. In Coherent Stress Testing: A Bayesian Approach, industryexpert Riccardo Rebonato presents a groundbreaking new approach tothis important but often. we make the case why a ‘coherent’ stress testing programme, demanding though . and Rebonato () show how the ‘most likely’ (or Maximum Entropy).
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Briefly, Rebonato’s answer to this conundrum is to develop a framework that leans heavily on human judgment, but in a formal and transparent way. He ranges widely intellectually — his footnotes are always worth reading — and offers useful suggestions for further reading at the end of each chapter. Table of contents Acknowledgements. Books by Riccardo Rebonato. It discusses the distinctions between risk and uncertainty, the different types of probability that are used in risk management today and for which tasks they are best used.
It turns out that having only some marginal probabilities puts significant bounds on the joint probabilities, and having some singly conditioned probabilities makes those bounds tighter. It discusses the distinctions between risk and uncertainty, the different types of probability that are used in risk management today and for which tasks they are best used.
Stress testing is positioned as a bridge testng the statistical areas where VaR can be effective and the cherent of total Keynesian uncertainty.
But it is a great strength of his approach that the relationship of the theoretical framework and its mathematics to the underlying modelling is always visible, and that the sensitivity of the conclusions to the assumptions and tdsting is transparent. A theoretical framework is illustrated with worked examples and accompanied by detailed advice on practical implementation.
This is an entirely peripheral concern, however. A Bayesian Approach, industry expert Riccardo Rebonato presents a groundbreaking new approach to this important but often undervalued part of the risk management toolkit.
The book is split into four parts. Return to Book Page. In part IV theauthor addresses more practical questions such as embedding thesuggestions of the book into a viable governance structure. And if the probabilities assigned by the risk manager prove incoherent, Rebonato provides an algorithm for modifying them. Attila Rebak rated it really liked it Dec 08, To see what your friends thought of this book, please sign up. Based on the author’s extensive work, research and presentationsin the area, the book fills a gap in quantitative risk managementby introducing a new and very intuitively appealin In Coherent Stress Testing: October External links: Part II lays down the quantitative foundations for the concepts described in the rest of the book.
To ask other readers questions about Coherent Stress Testingplease sign up. And I really enjoyed Coherent Stress Testing myself. Refresh and try again. The mathematics at the core of this looks intimidating at first glance, but is actually trivial — Venn diagrams, elementary probability, simple formalism — with some linear programming consigned to an appendix. You are currently using the site but have requested a page in the site. Here Rebonato suggests some ways of combining “top down” approaches driven by macroeconomic structural risks with “bottom up” approaches driven by trading book risks.
testimg P marked it as to-read Feb 13, Further constraints can be obtained using “Bayesian nets”, where the risk manager delineates the causal relationships between events, effectively marking some as independent or conditionally independent. Rebonato envisages a risk manager making order of magnitude estimates of marginal and conditional probabilities for maybe a dozen binary events.
Model diversity helps explain coordination between market participants, which in turn syress to “fat tails” in asset price movements. Lists with This Book.
The book is split into four parts. Thanks for telling us about the problem.
Taking Liberties Riccardo Rebonato Inbunden. Stress testing is positioned as a bridge between the statistical areas where VaR can be effective and the domain of total Keynesian uncertainty.
In Plight of the Fortune Tellers Rebonato explained some of the limitations of data-driven approaches to managing extreme financial risks, based on VaR or similar approaches, but didn’t really present an alternative.
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Want to Read Currently Reading Read. He also argues for a Bayesian view of probabilities, introduces the problems of tail co-dependence, and looks at what is involved in moving from associative to causal models. Domlim marked it as to-read Nov 10, It discusses thedistinctions between risk and uncertainty, the different types ofprobability that are used in risk management today and for whichtasks they are best used.
Trivia About Coherent Stress T There are no discussion topics on this book yet. In part IV the author addresses more practical questions such as embedding the suggestions of the book into a viable governance structure. Jeno Lapua marked tesfing as to-read Jun 06, Be the first to ask a question about Coherent Stress Testing. Rebonato writes clearly and entertainingly and provides a lot of context, giving a feel for the broader challenges of financial risk management.
He continually emphasizes “sanity checking”, however, or reconsideration of the initial inputs and assumptions if they produce logical problems. I read this one “because of” rebnoato although not “for” work. There is nothing specifically Bayesian about conditional probabilities or, despite the name, Bayes’ Theorem, so that part of his analysis works regardless of one’s interpretation of probabilities.
Markku is currently reading it Aug 10, He considers the difference between the bounded rationality and cognitive bias schools, before analysing the dangers of representativeness and causal-diagnostic biases. Rebonato makes no attempt to use macroeconomic theory here, perhaps unsurprisingly given how primitive that is.