Cutting edge introduction

Copula functions that provide a way of splicing the probability distributions of multiple assets together have taken a lot of flak since the crisis. Laurie Carver introduces this month’s technical articles by looking at the fate of such methods – and a new framework that could make them the foundation for tomorrow’s stress tests

The July stress test of Europe’s banks by the European Banking Authority (EBA) has come in for a fair amount of criticism. Some gripe that the scenarios were overly lenient, while risk managers complain the idiosyncrasies of credit modelling mean the results are not comparable from one institution to the next (Risk June 2011, page 12).

Another quibble – at the more specific end of the spectrum – comes from a quantitative analyst at one European bank, who takes aim at the stress test’s approach