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Scenario Generation for Stress Testing

With the advancement of technology, banks can now develop cost effective systems which are capable of “automating” certain aspects of the regulatory compliance process – scenario generation for stress testing being one such area. The Smart Cube’s ‘Rapid Scenario Expansion Framework’ has been designed to enable banks to drive value in this area.

Shocking the equities: Rapid scenario expansion at work

Banks need to expand the limited number of supervisory scenarios provided by regulators to a much broader set of drivers for several asset classes. The process can be overwhelming as hundreds of statistically sound and regulatory compliant models have to be built. A manual and repetitive process, prone to human error, has had to be followed for different regulators around the globe.

The Smart Cube deploys its “Systematic Modelling Suite” under the Rapid Scenario Expansion Framework to generate robust macroeconomic scenarios across different regulators. In this paper, the systematic modelling suite is used for generating scenarios for the S&P 500 Index to match the severity of the supervisory scenarios of the Federal Reserve, Band of England and European Banking Authority. The implementation can help banks create reliable and cost-effective stress testing systems and solutions.

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Authors

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Bhavna Khurana

With more than 12 years of financial and investment research experience, Bhavna is the client solutions architect for the Financial Services practice of The Smart Cube.

In her role, she acts as the relationship manager for key client accounts and is responsible for business development and designing of new financial research products and services for the practice. Bhavna is a certified Chartered Accountant (India) and a CFA charterholder. After spending more than 7 years in The Smart Cube’s Financial Research team in India, Bhavna now leads our financial services client solutions team from Chicago.

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Manish Sharma

With a wide-ranging experience of over 5 years in the field of credit risk management, Manish is responsible for developing credit risk services as part of The Smart Cube’s Quant Analytics Solutions.

Manish’s past experience includes working as an onsite consultant to a major bank holding company’s credit risk model development team. In his role, Manish was responsible for building regulatory compliant Basel and CCAR models.

Manish has cleared CFA Level 1 and holds an integrated post graduate degree with bachelors in technology and an MBA (Finance)