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Interpreting CCAR Equity Volatility Shocks

Article Quant Q&A · Author: User
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Summary

The note explains how to read volatility shocks in the CCAR 2018 severely adverse scenario. It clarifies that the listed shock sizes are additive percentage-point changes to implied volatility, rather than relative percentages or basis-point changes. For example, a 1M volatility of 21.0% with a 16.2-point shock becomes 37.2%.

The shocks apply simultaneously across the volatility curve, with each tenor receiving its own specified change. The example illustrates that the 1M, 6M, and 1Y points each move by different amounts, producing a shocked curve rather than a single parallel shift. This distinction matters when valuing options under the scenario. The material is a brief answer to an interpretation question; it does not provide the underlying CCAR documentation, explain how the shock magnitudes were calibrated, or discuss implementation details beyond the example.

Key ideas

  • CCAR volatility shock values are additive percentage-point changes to implied volatility.
  • Each tenor receives its own specified shock magnitude.
  • The tenor shocks are applied together to construct the shocked volatility curve.
  • The resulting curve shift is generally nonparallel when shock sizes differ across tenors.

Tags

OptionsVolatilityRisk management
Full text
# CCAR Shocks Scenario


# CCAR Shocks Scenario












I was going through CCAR-2018-severely adverse market shocks file and under the tab: Equity by Geography, I found these shocks.

I have two questions:

> 1) Whether the shocks to Vol points are in % or bps. For example, For Australia, bump to 1M vol is 16.2, so is this 16.2% of original Vol or it is a bump of 16.2 basis points to the original vol. 2) This is to just ensure that my understanding is correct: Shocks to Vol points are simultaneous shock or parallel shock? I think that we are providing simultaneous shocks to the vol surface and finding the PnL.

Can anyone please share their knowledge on this

It will be good if you can provide a source from where I can find these type of details.

Thanks

## Answer by Daneel Olivaw (score 3, accepted)

https://quant.stackexchange.com/a/40622

> "1) Whether the shocks to Vol points are in % or bps. For example, for Australia bump to 1M vol is 16.2, so is this 16.2% of original Vol or it is a bump of 16.2 basis points to the original vol?"

The shocks are in percentage points: for example if Australian 1M vol is 21.0%, the CCAR shocked 1M vol will be 21.0% + 16.2% = 37.2%.

> "2) This is to just ensure that my understanding is correct: Shocks to Vol points are simultaneous shock or parallel shock?"

Shocks are applied simultaneously to the whole curve, each tenor in the curve being shocked by the appropriate magnitude: for example, if your curve has 1M, 6M and 1Y tenors with vols 21.0%, 27.5% and 31.5% respectively, the CCAR shocked vol curve will be 37.2%, 46.3% and 52.0% respectively (+16.2ps, +18.8ps and +20.5ps).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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