help on stress test

maxb · July 23rd, 2015, 6:53 pm

Hi all,I'm doing some stress tests. I'm supposed to compare the current interest rate and the interest rate back in 2008. One way is to get average interest rate from 2007 to 2010. My supervisor suggested that I could also use '2 standard deviation lowest rate', which I don't quite understand what it is. He's super busy so I don't want to bother him with the question. Could anyone enlighten me on the subject?Thanks!

dtrehalose · July 23rd, 2015, 8:33 pm

I don't understand exactly what you are trying to do (e.g. are you using a single rate or a curve, what are you doing with the rate etc), but I suspect what you want to do is take regular rate history over 2007 to 2010 and work out the mean and std dev. Then use the mean - 2*sd value as your rate. This represents a 1 in 20 scenario i.e. 2 standard deviations.