EBA Guidelines on Stressed Value At Risk (Stressed VaR) EBA/GL ...

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6. The approach for identifying the appropriate historical period1. In order to choose a historical period for calibration purposes, institutions shouldformulate a methodology for identifying a stressed period relevant to their currentportfolios, based on one of the following two ways:i. judgement-based approaches; orii.formulaic approaches.2. A judgement-based approach is one that does not use a detailed quantitativeanalysis to identify the precise period to use for calibration, but rather relies on ahigh-level analysis of the risks inherent in an institution’s current portfolio and pastperiods of stress related to those risk factors. Where this judgement-based approachis used by institutions, it should include quantitative elements of analysis.3. A formulaic approach instead is one that applies, in addition to expert judgement,a more systematic quantitative analysis to identify the historical period representinga significant stress for an institution’s current portfolio. This more systematicapproach could be employed in a number of ways:i. A risk-factor based approach: an institution identifies a restricted numberof risk factors which are considered to be a relevant proxy for themovement in value of its portfolio. The historical data for these risk factorscan then be fully analysed to identify the most stressed period (forexample, through identification of the period of highest volatility of the riskfactors), in the historical data window.ii.A VaR based approach: the historical period is identified by running eitherthe full VaR model or an approximation over a historical period to identifythe 12-month period which produces the highest resulting measure for thecurrent portfolio.4. This approach should be employed to determine a historical period that wouldprovide a conservative capital outcome rather than just selecting the period ofhighest volatility.5. While either approach may be used by institutions, the use of the formulaicapproach, where possible, should be preferred for the identification of the historicalperiod.6. Institutions may also combine the above two approaches to limit thecomputational burden of the formulaic approach. This can be done by using thejudgement-based approach to restrict the historical data periods to be considered inthe formulaic approach.7. Irrespective of the approach used, institutions should provide evidence that thestressed period is relevant for their current portfolio and that they have considered a10
ange of potential historical periods in their analyses. The institutions should alsohave to prove that the portfolio on which the identification of the stressed periods isbased is representative of the institutions’ current portfolio, e.g. by applying theapproach to identify the stressed period to other typical or previous portfolios. As anexample, for many portfolios, a 12-month period relating to significant losses in2007/2008 would adequately reflect a period of such stress, but, in addition to that,other periods relevant to the current portfolio should also be considered byinstitutions.8. In all cases no weighting of historical data should be applied when determiningthe relevant historical period or when calibrating the Stressed VaR model, as theweighting of data in a stressed period would not result in a true reflection of thepotential stressed losses that could occur for an institution’s portfolio.9. Finally, competent authorities may require institutions to use antithetic data whencalibrating the Stressed VaR model, especially where an institution’s portfolio ischaracterized by frequent position changes.7. Documentation to support the approach used to identify the stressedperiod1. Irrespective of the approach applied, institutions must produce robustdocumentation justifying the choice of approach made. This should in all casesinclude quantitative assessments to support the current choice of the historicalperiod and its relevance for the current portfolio. This should also includedocumentation of the modelling of risk factors’ returns.2. Where institutions apply a formulaic approach to identify the stressed period thefollowing issues should, as a minimum, be addressed in the related documentation:i. Justification for the choice of risk factors used if a risk-factor basedapproach is applied and where fewer than the modelled risk factors areselected.ii.Justification of any simplifications where a simplified VaR model is used toidentify the historical period.3. Where a formulaic approach is applied, which is based on a simplified VaR model,an institution should also provide adequate evidence that the simplified measuregives directionally the same VaR results as the full VaR model (and therefore isaccurate in determining the most stressed period). This evidence should includeempirical analysis.4. Where a formulaic approach is applied, which aims at identifying the most volatileperiod for a set of risk factors, an institution should provide adequate evidence thata period of high volatility is a suitable proxy for a period in which the VaR measure11
Page 1 and 2: EBA Guidel
Page 3 and 4: I. Executive SummaryThe amendments
Page 5 and 6: The guidelines presented in this pa
Page 7 and 8: ContentsIII. EBA <
Page 9: VaR calculations (which would also
Page 13 and 14: C. Stressed VaR methodology10. Cons
Page 15 and 16: 9. In terms of calibration to marke
Page 17 and 18: historical data series should be ap
Page 19 and 20: Feedback table on CP 48: analysis o
Page 21 and 22: can be achieved if the US moves ahe
Page 23 and 24: Para 6.8more distant past. Since th
Page 25 and 26: the need for an ex-post notificatio
Page 27 and 28: concern for us. We feel that this w
Page 29 and 30: the other hand it means that VaR an
Page 31: V. Confirmation of compliance with

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