Abstract
We present a theoretical framework for stressing multivariate stochastic models. We consider a stress to be a change of measure, placing a higher weight on multivariate scenarios of interest. In particular, a stressing mechanism is a mapping from random vectors to Radon–Nikodym densities. We postulate desirable properties for stressing mechanisms addressing alternative objectives. Consistently with our focus on dependence, we require throughout invariance to monotonic transformations of risk factors. We study in detail the properties of two families of stressing mechanisms, based respectively on mixtures of univariate stresses and on transformations of statistics we call Spearman and Kendall’s cores. Furthermore, we characterize the aggregation properties of those stressing mechanisms, which motivate their use in deriving new capital allocation methods, with properties different to those typically found in the literature. The proposed methods are applied to stress testing and capital allocation, using the simulation model of a UK-based non-life insurer.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
