In addition to standard risk analysis, Plutus:VaR also supports stress testing to help you assess the potential impact of extreme market conditions on your portfolio. Stress testing allows you to simulate scenarios under adverse conditions, testing the resilience of your portfolio against significant market shocks.

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Stress Testing for Monte Carlo

For Monte Carlo simulations, you have several adjustable parameters to customize your stress testing scenarios:

  • Volatility Lookback Days: This parameter defines the number of days used for calculating volatility in the Monte Carlo simulations. You can adjust this to test how your portfolio performs under different historical volatility periods. The longer the lookback period, the more historical data is used to model volatility.

  • EWMA Decay Factor: The Exponentially Weighted Moving Average (EWMA) decay factor allows you to adjust how much recent volatility should impact future projections. A higher decay factor gives more weight to recent market conditions, while a lower decay factor reduces the impact of recent volatility.

  • Market Volatility Multiplier: This multiplier can be applied to the calibrated market volatilities, amplifying the market movements and stress testing how your portfolio responds to extreme market conditions.

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Stress Testing for Historical Simulation

For historical simulations, you can customize your stress testing scenarios by selecting specific historical periods, including or excluding specific dates, and defining custom event ranges. This flexibility allows you to model extreme but realistic market scenarios and understand how your portfolio might perform under these conditions:

  • Historical Data Range: You can define a specific period for your historical data to focus on relevant market conditions. For instance, selecting a period covering a market crisis can reveal how your portfolio might react under similar stress.

  • Date Inclusion and Exclusion: Fine-tune your historical data set by including or excluding specific dates. For example, you could exclude unusually calm periods or include additional high-volatility days to better model potential market shocks.

  • Custom Event Addition: Incorporate notable market events that may not fall within your primary historical range, such as significant financial downturns or rallies, to create a more complete stress testing scenario.

By tailoring these parameters, you gain deeper insight into your portfolio’s resilience across various historical and hypothetical stress scenarios, enhancing your overall risk management strategies.

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