Coherent Stress Testing A Bayesian Approach to the Analysis of Financial Stress

Why a book about stress testing? And why a book about stress testing now? Stress testing has been part of the risk manager's toolkit for decades. What justifies the renewed interest from practitioners and regulators for a risk management tool that has always been the poor relation in the family of analytical techniques to control risk? And why has stress testing so far been regarded as a second-class citizen? Understanding the reason for the renewed interest is simple: the financial crisis of 2007-2009 has shown with painful clarity the limitations of the purely statistical techniques (such as VaR and Economic Capital) that were supposed to provide the cornerstones of the financial edifice. As once in a lifetime events kept on occurring with disconcerting regularity in the twenty-or-so months starting with July 2007, it became clear that something new was required.Stress Testing: A Coherent Approach presents groundbreaking new approaches to stress testing. Acknowledged industry expert Riccardo Rebonato moves beyond economic capital and VaR approaches to stress testing to offer a new approach to this risk management discipline. The book sets out by looking at the existing models and how they are used (and abused) by the risk manager. It then moves on to look at the different probabilistic approaches that can be taken in the measurement of risk, at well known and less well known quantitative approaches for stress testing, linear programming, before proposing a new approach to stress testing. Finally, the book sets all of the above in the context of financial institution and a new era of regulation and governance.

DR. RICCARDO REBONATO (London, UK) is Head of Front Office Risk Management and Head of the Clients Analytics team at BGM RBS. He is visiting lecturer at Oxford University (Mathematical Finance) and adjunct professor at Imperial College (Tanaka Business School). He sits on the Board of Directors of ISDA and on the Board of Trustees for GARP. He is an editor for the International Journal of Theoretical and Applied Finance, Applied Mathematical Finance, Journal of Risk, and the Journal of Risk Management in Financial Institutions. He holds doctorates in Nuclear Engineering and in Science of Material/Solid State Phsyics. He was a research fellow in Physics at Corpus Christi College, Oxford, UK.