PT  - JOURNAL ARTICLE
AU  - Gloria GonzáLez-Rivera
TI  - Value in Stress
AID  - 10.3905/jfi.2003.319349
DP  - 2003 Sep 30
TA  - The Journal of Fixed Income
PG  - 7--18
VI  - 13
IP  - 2
4099  - https://pm-research.com/content/13/2/7.short
4100  - https://pm-research.com/content/13/2/7.full
AB  - Stress-testing as a risk management tool lacks scientific foundation, and, as the current practice goes, is completely subjective. Nevertheless, it is a mandatory practice to monitor capital adequacy of the government-sponsored enterprises, Fannie Mae and Freddie Mac. A rational approach to stress-testing argues for a conceptual shift in the current practice. Consideration of fixed stressful scenarios, as the regulation contemplates, is not an optimal practice. The measure of risk proposed here, value in stress (ViS), satisfies a set of rational axioms and allows assignment of a probability to the value under stress. This approach provides direct answers to the current limitations of stress-testing, as expressed by the Committee on the Global Financial System at the Bank for International Settlements, which recommends stress-testing for banking institutions.