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How the PRIIPs Recommended Holding Period Determines Scenario Horizon

Article Quant Q&A · Author: Ryko
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Summary

The document clarifies how the recommended holding period (RHP) relates to the PRIIPs performance scenario calculation. The question asks whether a longer RHP requires collecting an equally long history of prices and returns, and contrasts this with a stated minimum historical data requirement for market risk measurement and other calculations.

The answer explains that the scenario horizon parameter N is determined by the number of trading periods in the RHP. It applies across the optimistic, pessimistic, neutral, and stress performance scenarios; it does not specify how many historical observations must be collected. Thus, N should not be interpreted as a historical sample-length requirement. The reply is brief and does not walk through the stress formula, data requirements, or regulatory text in detail. It resolves the interpretation of N, but does not independently validate the question’s assumptions about minimum price history or explain implementation for a particular product.

Key ideas

  • The number of trading periods in the recommended holding period determines N.
  • The N parameter applies to all PRIIPs performance scenarios, including the stress scenario.
  • N describes the scenario horizon, not the amount of historical price data to collect.
  • The response does not specify separate historical data requirements for individual products.

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StatisticsRisk management
Full text
# PRIIPs category 2 stress scenario calculation


# PRIIPs category 2 stress scenario calculation












I am having troubles with the calculation of the PRIIPs stress performance scenario so I would appreciate any help.

As far as I understand from the formula, the stress calculation, unlike the calculation of the other scenarios, depends on the length of the recommended holding period (RHP). I deduct that based on paragraph 10.b. of Annex IV of the RTS which states that the historical lognormal returns from t0 to tN have to be identified. Is N to be understood as “number of trading periods in the recommended holding period” (as defined in Annex II, paragraph 12).

E.g. for a RHP of 1 year and assumed 252 trading days, I should identify a total of 253 returns, meaning I should have a history of 254 prices. Does this mean that for a product with a RHP of 10Y I should have 10Y of historical returns/prices? On the other hand, for the calculation of MRM and all other scenarios I can simply rely on the minimum 2Y of historical prices.

Thanks, Ryko

## Answer by Branislav Cuchran (score 1)

https://quant.stackexchange.com/a/36383

No, all performance scenarios are N-dependent, where N is number of trading periods in the RHP (recommended holding period). In that sense there is no difference between the optimistic, pesimistic, neutral and stress scenarios.

The N has therefore no relation to how many historical returns are you obliged to gather. It only depends on the length of RHP.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.