PRIIPs Stress Scenarios and Rolling Volatility Windows
Summary
The document discusses how to calculate a one-year PRIIPs category 2 stress scenario for the Euro Stoxx 50 and why the reported value can change sharply between monthly KID dates. The response says the stress volatility should be based on rolling 21-day volatilities across the full five-year calculation sample, rather than on only the latest year. Using a shorter window would make the estimate more volatile and can lead to an incorrect stress scenario calculation.
It also questions how readers should interpret a single reported scenario value. The author reports that their own calculations show large month-to-month shifts, including step changes when periods of high market volatility enter or leave the five-year sample window. A historical volatility episode moving out of the sample is given as an example. These calculations illustrate sensitivity to the sample window; they do not establish how every KID implementation behaves or resolve how advisers, clients, or regulators interpret the figures.
Key ideas
- PRIIPs stress volatility is calculated from rolling 21-day volatilities over a five-year sample.
- Using only the latest year can make the stress estimate more volatile.
- Stress scenario outcomes can shift substantially from month to month.
- Changes in the five-year sample window can create step changes as volatile periods enter or leave it.
- A single scenario figure needs interpretation in light of its calculation window and limitations.
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Full text
# PRIIPs category 2 stress scenario - general question # PRIIPs category 2 stress scenario - general question Having calculated the 1Y stress scenario at certain dates on the Euro stoxx 50 series, I realise that it jumps during June 2017. As at 31/5/2017 I get 0.347660613, and as at 30/06/2017 I get 0.663384825. Am I right in saying that the KID would show at the end of May that there is a stress risk of losing 65.23% over one year, while the KID at the end of June would show a stress risk of losing 33,66% over one year ? Firstly, can someone indicate if my calculation is terribly wrong ? Secondly, would financial advisors, clients, regulators be aware of the limitations of showing these scenario statistics at one single date, and without some interpretation ? Regards. ## Answer by Tim Wilding (score 1) https://quant.stackexchange.com/a/38773 I am a bit late to this, but I believe that your calculation is incorrect based on your response to the questions in the comments. The stress volatility used for the stress scenario should be calculated from rolling 21-day volatilities for your entire 5-year data sample (see PRIIPs stress scenario 2 calculation period of calculation ) and not just the most recent year. So, for example, in my calculations of the stress volatility used for the 1 year calculation, the stress volatility does not change between May and June 2017. Using only the most recent year would make the estimate of the stress scenario much more volatile. In spite of that, I think you are right to have concerns regarding the interpretation of these figures. My own calculations shows that the stress scenario outcomes remain subject to wild changes from one month to the next. I constructed a chart from my calculations for the Euro Stoxx 50. The chart clearly shows large step changes as periods of major stock market volatility move in and out of the 5 year data sample window. For example, there is a large change in 2014 as the 2008-2009 volatility moves out of the sample.
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