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Risk Management Strategies for Black Swan Events

Learn how to unmask black swans, navigate snow-ball effects, and conduct effective stress tests with Gil & Associates in March 2015. Explore simulation-based scenario generation, consistent measurement of capital and liquidity, and loan loss projections on macroeconomic scenarios. Discover the importance of contingency planning in volatile markets and disruptive events. Stay prepared with early warning signals and advanced portfolio performance evaluation.

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Risk Management Strategies for Black Swan Events

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  1. Unmasking Black Swans March 2015 Gil & Associates

  2. Snow-Ball Effects What stress test should do: Include historical and unprecedented scenarios Stretch over multiple periods Capture snow-ball style consequences Address change in correlations during stress Provide early warning signals for contingency planning Gil & Associates

  3. 110 105 100 Diffusion process 95 Diffusion process continues 90 Jump 85 80 1 - Jan - 15 1 - Jun - 15 1 - Jan - 16 Simulation Based Scenario Generation Types of Scenarios Macroeconomic Regime Change • Reverse • Historical • Hypothetic • Institution – Specific • Multi – Event • Global Gil & Associates

  4. Consistent Measurement of Capital and Liquidity SIMULATED SCENARIOS AS 3-D NODES PORTFOLIO SYNTHESIS - PERFORMANCE LINKED TO ECONOMIC SCENARIOS Pathsthousands of scenarios generated at every time point Paths Time Time Indicators of Portfolio Performance Macro and Market Variables economic growth rates, interest rates, credit spreads, equity market performance, etc. Gil & Associates

  5. Loan Loss Projections on Macroeconomic Scenarios Macro Factors • Simulated shocks • Credit spread dynamics • Feedback loop Credit Spreads Credit Spreads Systematic Component Idiosyncratic Component PD Correlations LGD Portfolio Losses Gil & Associates

  6. Contingency Planning “Asset bubbles” and bull markets; periods of rapid market increases “Stable” scenarios with higher initial likelihood You Are Here Disruptive events; periods of market turmoil and rapidly changing correlations 6 Time Gil & Associates

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