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Philipp Aigner, Mainz University of Applied Sciences; Sebastian Schlütter, Mainz University of Applied Sciences
Banks and insurance companies employ sophisticated methods to measure their portfolio-wide risks in terms of an economic or regulatory capital. Reverse stress tests can be used to communicate the model and its outcomes to decision makers and stakeholders, allowing them to challenge the model and to take informed decisions. In this sense, a single stress scenario is only of limited use since it does not allow to evaluate how diversification effects alter as a result of a portfolio change. This paper suggests a new concept to define several reverse stress scenarios whose outcomes can be aggregated towards the current portfolio's risk measurement. The scenarios allow for evaluating portfolio changes in accordance with the original (``model-based'') risk measurement in the sense of first and second order derivatives starting from the current portfolio. Our numerical examples for an insurance company demonstrate that risk evaluations based on our scenarios are better in line with the original risk measurement than those of concurrent methods such as principal component analysis.
