period

Irrespective of the approach applied, institutions must produce robust documentation justifying the choice of approach made. This should in all cases include quantitative assessments to support the current choice of the historical period and its relevance for the current portfolio. This should also include documentation of the modelling of risk factors’ returns.

Where institutions apply a formulaic approach to identify the stressed period the following issues should, as a minimum, be addressed in the related documentation:

• i. Justification for the choice of risk factors used if a risk-factor based approach is applied and where fewer than the modelled risk factors are selected.
• ii. Justification of any simplifications where a simplified VaR model is used to identify the historical period.

Where a formulaic approach is applied, which is based on a simplified VaR model, an institution should also provide adequate evidence that the simplified measure gives directionally the same VaR results as the full VaR model (and therefore is accurate in determining the most stressed period). This evidence should include empirical analysis.

Where a formulaic approach is applied, which aims at identifying the most volatile period for a set of risk factors, an institution should provide adequate evidence that a period of high volatility is a suitable proxy for a period in which the VaR measure

11 would be high and that the lack of inclusion of correlations or other factors that would be reflected in the VaR measure does not result in rendering this proxy unsuitable.

B. Review of the stressed period