Stress Tests, Toxic Assets, TARP, and Buying Your First Home

Frank Meyer - Republic Mortgage Insurance Company

Faculty Mentor
Jeff Scroggs - North Carolina State University


Key Words: probability distribution function, kertosis, variance, covariance, coppula, VaR, CVaR, GARCH

Description:
This project will focus on a quantitative examination of stress-testing of banks. The SCAP framework was used by the Federal
Reserve in their recent testing of 19 banks [3]. A framework for stress testing has been proposed by Christoffersen [2] -- how
does SCAP fit the proposed framework? Is SCAP adequate to determine capital reserves needed by banks? If not, what
improvements could be implemented?

As time permits, we will examining the pricing of mortgage-backed securities. Some of the securities have been labeled "toxic
assets".

Background Material:

  • Start with the definition of Value at Risk (VaR) and Conditional Value at Risk (CVaR): Chapter 14 of Nofsinger, Haugen, Hull
    and Seiler's book: Options, Futures and Other Derivatives, 5th edition. Other editions are just as good and commonly available.
  • Stress testing: Chapter 8, Christoffersen, Elements of Financial Risk Management
  • Government's approach to stress testing
  • Troubled Assets: Bebchuk
  •