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arXiv · 2606.07575

Forward-Looking Stress Testing Under Macro Scenarios: Stable SVaR Estimation Using a Hybrid GPR-HS Framework with SACS

Ujjwala Vadrevu
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Abstract

Regulatory stress testing frameworks, including the Comprehensive Capital Analysis and Review (CCAR) and the Internal Capital Adequacy Assessment Process (ICAAP), require robust Stressed Value-at-Risk (SVaR) estimation under forward-looking macroeconomic scenarios. Traditional parametric approaches often exhibit numerical instability under extreme shocks, reducing the reliability of capital projections. This paper extends the Hybrid Gaussian Process Regression Historical Simulation (GPR-HS) framework of Vadrevu (2026) to forward-looking stress scenarios, demonstrating stability across three regimes: West Asia War, Climate Risk, and AI Bubble/Regulation. A key contribution is the Scenario-Averaged Covariance Stabilization (SACS) framework, which constructs stress covariance as a weighted aggregation of historical crisis regimes, providing stable and interpretable dependence structures. Stressed return paths are generated over a 252-day horizon using deterministic drift and stochastic residuals, while volatility is modeled via Gaussian Process Regression with Aggressive Noise Initialization (ANI). The framework exhibits consistent convergence across all assets and scenarios. SVaR ranges from -2.1020% to -2.2231%, with the coherence property |SES| > |SVaR| preserved. The results support GPR-HS with SACS as a stable and regulator-aligned approach for forward-looking SVaR and SES estimation in CCAR and ICAAP applications.

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BibTeXRIS

Ujjwala Vadrevu. 2026-05-26. Forward-Looking Stress Testing Under Macro Scenarios: Stable SVaR Estimation Using a Hybrid GPR-HS Framework with SACS. https://arxiv.org/abs/2606.07575

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