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How big should a Stress Shock be?

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arxiv 1905.10164 v1 pith:4GC2EFP6 submitted 2019-05-24 q-fin.RM

classification q-fin.RM
keywords resultsstresshistoryknownkurtosisshockshocksstandard
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Stress shocks are often calculated as multiples of the standard deviation of a history set. This paper investigates how many standard deviations are required to guarantee that this shock exceeds any observation within the history set, given the additional constraint of kurtosis. The results of this analysis are then used to validate the shocks produced by some stress test models, in particular that of Brace-Lauer-Rado. A secondary application of our results is to investigate three known extensions of Chebyshev's Inequality where the kurtosis is known. It is found that our results give a tighter bound than the well-known inequalities.

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    The worst-case one-sided tail probability under mean 0, variance 1, and fourth moment ≤ κ is a four-regime map with closed forms on three regimes and an algebraic system on the fourth, plus a one-sided/two-sided colla...

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