TRADITIONAL STRESS TESTS ARE AT BEST USELESS; AT WORST, THEY COULD BE DEVASTATING
The markets are in turmoil. Economies are being shut down. Health systems are struggling to cope. In the face of the coronavirus pandemic and the upheaval it’s caused, financial institutions and corporations are performing severe stress tests daily. They do them in the traditional way: applying historical sensitivities and correlations to model the stresses of the coming days, weeks and months.
But with dramatic market moves now a daily occurrence, historical relationships are becoming irrelevant. Measures that were appropriate for normal trading and gradual change are misleading under catastrophic conditions with sharp and sudden swings. Nor is the experience gained from previous crises helpful. Today is unlike 2008, the Great Depression, or any other past event. If U.S. rates turn negative, what should credit spreads be? They’ve already more than doubled in the past few weeks. Our analysis shows even investment grade spreads could more than triple within the next quarter.
THE RIGHT DECISIONS RIGHT NOW
Economists, using fundamental models, are trying to answer these questions but this can take weeks. In today’s conditions, institutions need answers to dozens of such questions daily in order to make the right decisions right now.
It is more critical than ever that stress tests performed today are comprehensive and quick. The idea that you can stress test a single variable while the rest of the world (and other variables) stays constant or follows historical trends is absurd.
Straterix’s tools are built for these kinds of situations. They generate thousands of scenarios, incorporating all types of swings and unprecedented market moves, while factoring in the changing correlations between variables in crisis.
ASKING THE RIGHT QUESTIONS
Any “what if” questions you can think of, as well as many you can’t, are included in our scenarios. An inquiry with the trajectory of one – or several – variables returns a comprehensive set of market drivers. Not only do we answer these questions; we suggest which questions you should be asking.
As always, the right question to ask now is not which scenario evolution will likely materialize – that’s impossible to tell. Even if we could somehow forecast how this pandemic plays out, there is no guarantee that other events and calamities that cause a double dip won’t occur.
Assessing the potential combinations of shocks and market reactions is a daunting task. The only way to prepare is by analyzing multiple potential outcomes, considering the changing interrelations between market drivers and computing the second – and even third – order effects.
The right questions to ask now are:
(a) what are the potential outcomes (within reasonable probability)
(b) what is the impact of these scenarios on my portfolio
(c) what (if anything), should I do? How do I know when to act?
By using Straterix’s advanced Scenario Generation Engine, combined with its powerful AI-driven analytics, we can perform these computations and recommend immediate, responsible next steps within a matter of hours.
Together with our ability to rapidly examine clients’ balance-sheets/portfolios, and provide a quick, top-down review of risks, potential actions and remediation plans, our service provides the answers you need, when you need them.
SO, WHAT’S NEXT?
For the next six weeks, we will publish detailed scenario distributions on a weekly basis free of charge. This will allow any institution, big or small, to evaluate potential outcomes on their portfolio and/or balance sheet.
The scenario distributions contain 300+ macro and market variables over a 12-month horizon and can be downloaded from our website. We will continuously publish instruction material on our website that we believe to be helpful for efficient analysis.Should you require any assistance on how to apply these scenarios to your organization or change/extend the variable selection, don’t hesitate to contact us on info@straterix.com.