Research and publications
Climate Scenario Analysis and Stress Testing for Investors: A Probabilistic Approach
The use of stress testing and scenario analysis is a generally accepted concept in financial risk management. However, climate scenarios are different in two respects: because they cannot be built ...
Author(s):
Riccardo Rebonato, Dherminder Kainth, Lionel Melin
Summary:
The use of stress testing and scenario analysis is a generally accepted concept in financial risk management. However, climate scenarios are different in two respects: because they cannot be built by ‘resampling’ past history (as we have not encountered yet instances of the climate damages whose effects we want to explore); and because the end users of the scenarios are unlikely to be able to associate them even with very approximate probabili- ties (again, this is due to the unprecedented nature of climate change in historical times). In this paper, the authors therefore propose a framework to produce scenarios that reflect the full uncertainty of outcomes, and give an (approximate) assessment of the relative likelihood of their occurrence.
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| Date : | 30/01/2024 |
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