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Stress Testing and Scenario Analysis

The document outlines a Python script that analyzes historical stock data for a portfolio of four companies (AAPL, MSFT, AMZN, TSLA) using Yahoo Finance. It computes daily returns, portfolio returns, and performs a stress test to evaluate potential losses under market shocks, calculating Value-at-Risk (VaR) and Expected Shortfall (ES) at a 95% confidence level. Additionally, it conducts Monte Carlo simulations to estimate VaR and ES under hypothetical market conditions, visualizing the results with plots.

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arjitdutta100
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31 views3 pages

Stress Testing and Scenario Analysis

The document outlines a Python script that analyzes historical stock data for a portfolio of four companies (AAPL, MSFT, AMZN, TSLA) using Yahoo Finance. It computes daily returns, portfolio returns, and performs a stress test to evaluate potential losses under market shocks, calculating Value-at-Risk (VaR) and Expected Shortfall (ES) at a 95% confidence level. Additionally, it conducts Monte Carlo simulations to estimate VaR and ES under hypothetical market conditions, visualizing the results with plots.

Uploaded by

arjitdutta100
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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import numpy as np

import pandas as pd
import matplotlib.pyplot as plt
import seaborn as sns
from scipy.stats import norm

# Load historical data from Yahoo Finance


import yfinance as yf
tickers=['AAPL', 'MSFT', 'AMZN', 'TSLA']
weights = np.array([0.25, 0.25, 0.25, 0.25])
data = yf.download(tickers, start="2010-01-01", end="2024-01-01")['Close']

[*********************100%***********************] 4 of 4 completed

data.head()

Ticker AAPL AMZN MSFT TSLA

Date

2010-01-04 6.440331 6.6950 23.254044 NaN

2010-01-05 6.451464 6.7345 23.261562 NaN

2010-01-06 6.348848 6.6125 23.118807 NaN

2010-01-07 6.337110 6.5000 22.878382 NaN

2010-01-08 6.379242 6.6760 23.036165 NaN

Next steps: Generate code with data toggle_off View recommended plots New interactive sheet

# Compute daily returns


returns = data.pct_change().dropna()

# Portfolio returns
portfolio_returns = returns.dot(weights)

# Plot portfolio returns


plt.figure(figsize=(12,5))
plt.plot(portfolio_returns, label="Portfolio Returns")
plt.axhline(y=0, color='r', linestyle='dashed')
plt.title("Portfolio Returns Over Time")
plt.legend()
plt.show()

# Define market shock (Hypothetical Stress Test)


stress_shock = np.array([-0.5, -0.5, -0.5, 0.1]) # Stocks crash 50%, bonds rise 10%

# Compute stressed portfolio return


stressed_return = np.dot(weights, stress_shock)
print(f"Portfolio return under stress: {stressed_return*100:.2f}%")
Portfolio return under stress: -35.00%

# Compute historical VaR at 95% confidence


confidence_level = 0.95
VaR_95 = -np.percentile(portfolio_returns, (1-confidence_level)*100)

# Compute Expected Shortfall (Conditional VaR)


ES_95 = -portfolio_returns[portfolio_returns < -VaR_95].mean()

print(f"95% Value-at-Risk (VaR): {VaR_95:.4f}")


print(f"95% Expected Shortfall (ES): {ES_95:.4f}")

95% Value-at-Risk (VaR): 0.0269


95% Expected Shortfall (ES): 0.0390

num_simulations = 1000
simulated_shocks = np.random.normal(-0.05, 0.02, (num_simulations, len(tickers))) # Mean drop 5%, StdDev 2%
stressed_returns = simulated_shocks.dot(weights)

#Monte Carlo VaR & ES


VaR_MC = -np.percentile(stressed_returns, (1-confidence_level)*100)
ES_MC = -stressed_returns[stressed_returns < -VaR_MC].mean()

print(f"Monte Carlo 95% VaR: {VaR_MC:.4f}")


print(f"Monte Carlo 95% ES: {ES_MC:.4f}")

Monte Carlo 95% VaR: 0.0662


Monte Carlo 95% ES: 0.0704

# Plot
sns.histplot(stressed_returns, kde=True, bins=50, color="blue")
plt.axvline(-VaR_MC, color='red', linestyle="--", label="95% VaR")
plt.axvline(-ES_MC, color='green', linestyle="--", label="95% Expected Shortfall")
plt.legend()
plt.title("Monte Carlo Simulation of Market Stress Scenarios")
plt.show()

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