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Description of the EDHEC Stress Testing Tool

The EDHEC Stress testing engine provides a tool for analysing complex financial scenarios in a coherent, intuitive yet mathematically rigorous way. The underlying methodology is based on the Bayesian Net technology. In the application a number of economically and financially relevant scenarios will be analysed, and the impact of the root causes propagated via a number transmission channels to a number of reference asset prices. The joint probabilities attaching to various configurations of asset prices will then be obtained. These outputs can then be used for stress-testing, portfolio construction, transactional analysis, and, in general, for all applications where the impact of user-defined shocks (economic, geo-political, etc) is of interest. Sensitivity analysis of the outputs and what-if analysis can be easily carried out.


Related Material on Stress Testing

Featured Books


Portfolio Management
Portfolio Management under Stress: A Bayesian-Net Approach to Coherent Asset Allocation

A publication offering a novel way to apply the well-established Bayesian-net methodology to the important problem of asset allocation under conditions of market distress or, more generally, when an investor believes that a particular scenario (such as the break-up of the Euro) may occur.


Authors: Riccardo Rebonato, Alexander Denev
Editions: Cambridge University Press – pages


Portfolio Management
Coherent Stress Testing: A Bayesian Approach to the Analysis of Financial Stress

In Coherent Stress Testing: A Bayesian Approach, industry expert Riccardo Rebonato presents a groundbreaking new approach to this important but often undervalued part of the risk management toolkit.
Based on the author’s extensive work, research and presentations in the area, the book fills a gap in quantitative risk management by introducing a new and very intuitively appealing approach to stress testing based on expert judgement and Bayesian networks. It constitutes a radical departure from the traditional statistical methodologies based on Economic Capital or Extreme-Value-Theory approaches.

Author: Riccardo Rebonato
Editions: John Wiley & Sons, 10 juin 2010 – 238 pages



International Journal of Theoretical and Applied Finance

In this paper we discuss the common shortcomings of a large class of essentially-affine models in the current monetary environment of repressed rates, and we present a class of reduced-form stochastic-market-risk affine models that can overcome these problems. In
particular, we look at the extension of a popular doubly-mean-reverting Vasicek model, but the idea can be applied to all essentially-affine models.
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Author: Riccardo Rebonato
10 june 2017


bayesian nets for stress testing and scenario analysis




In this webinar on stress testing with bayesian nets and related techniques, Riccardo Rebonato looks at extracting business value from the stress testing process: 

  • How to deal with the dimensionality curse
  • How to propagate “stressed views” on a handful of risk factors to a complex portfolio
  • How to make the stressed scenario consistent with the normal market conditions
  • How to carry out sensitivity analysis

Read more »