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June 22, 2015

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10/19/2015 03:17 PM

very good analysis of the instantaneous shock test. Need more articles like this as the FED approaches its change in FF rate.

Paul Meissner

6/22/2015 04:34 PM

While I agree with the sentiments, these arguments have been around for quite a few years, and there are a lot of straw man arguments in this brief article. I don't know of anyone who thinks an instantaneous & parallel rate shift is either likely or a really good basis for modeling IRR. That's why our CU already does ramped shocks, as well as some rate twist modeling for non-parallel rate shifts. This article hardly qualifies as suggesting some earth-shattering change; if the author can get regulators to stop requiring unrealistic rate shifts, now THAT would be helpful. NMD's, yes, that's a modeling problem, but the biggest problem is that we're all trying to model behavior outside of any relevant range of comparative experience. A 2% point rate change from 4% to 6% is one thing (increasing by a factor of 1/2), but a 2% change from 0.50% to 2.50% (increase by a factor of 5x) could elicit behavior we've never before experienced. Overall, not a ground-breaking opinion/article.

David Merrell

6/22/2015 11:19 AM

There can be so much more said in support of this premise but it is a simple argument stated weel that is so true. Make sure your board understands it. It is also true for NEV or Market Value risk analysis. The results cannot be accurate when the assumptions are so wrong. The instantaneous shock has no relationship to reality nor does the assumption they remain at that level through eternity. Management decisions based on those bad assumptions have resulted in bad results in the past and will in the future.

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