Coherent Stress Testing

Riccardo Rebonato

Book cover

I read this one “because of” work although not “for” work. I won’t bore my dear Goodreads friends with technical nuances, but I thought the book was quite interesting. It addresses head-on a conundrum that is at the heart of stress-testing: the longer your stress time-horizon, the fewer relevant datapoints you can draw on, and the further you go back in history for your dataset, the less sure you can be that those datapoints represent “the same thing” you are interested in today. Briefly, Rebonato’s answer to this conundrum is to develop a framework that leans heavily on human judgment, but in a formal and transparent way. He accomplishes this via a nice tool that I had never encountered before, called a Bayesian net (sounds more complicated than it is). This is very different from the standard approach to stress testing, and I think it is really valuable to have people developing a diverse set of ideas about how one might go about the process.

My Goodreads rating: 4 stars