Stress Testing for Alphas

We describe an innovative portfolio-construction workflow that takes its return expectations directly from the results of a stress test.

In this paper, we took the stress-testing process one step further and showed how the resulting contributions to expected loss could be used as inputs to construct portfolios for each specific stress scenario. Using the process described, investors can also construct candidate portfolios representing a hedge for each scenario and include the target portfolio in their risk management process during rebalancing.

Authors

Olivier d'Assier

Senior Principal, Applied Research - APAC