The Scenario Shocks Worth Running Every Day
A short, standing list of stress scenarios — a rates spike, a vol spike, a liquidity freeze — that a desk reruns on the current book every day, rather than only after something has already gone wrong.
Value-at-risk and standard volatility measures are built from recent history, which means they're structurally blind to moves that haven't happened recently — exactly the moves that do the most damage. Daily scenario shocks fill that gap: a small, fixed set of stress scenarios applied to the current portfolio every single day, regardless of whether markets have been calm, so the desk always knows "if this specific bad thing happened today, how much would we lose right now."
A standard shortlist covers the handful of shock types that recur across market history: a large parallel shift in interest rates, a sharp spike in implied volatility (which hurts short-gamma options books), a sudden widening of credit spreads, a severe single-day equity drawdown, and a liquidity-stress scenario where bid-ask spreads widen and normal position sizes can't be exited without heavy market impact. Each scenario is applied mechanically to today's actual positions — not to a hypothetical or historical portfolio — so the number reflects current risk, not last month's.
Running the same shocks every day, rather than only reactively after a real shock has already occurred, is what makes them useful: a position that would be fine today but becomes dangerously exposed to a rate-shock scenario next week gets flagged while there's still time to trim it, not after the shock has already hit.
Scenario shocks answer "what if" using today's actual book, applied daily regardless of current calm — this catches building exposure to bad-but-plausible events that a backward-looking volatility measure, by construction, can't see coming.
Further reading
- Jorion, Value at Risk, ch. 17