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Stress Testing of REPO Portfolio

Student: Anokhina Mayya

Supervisor: Vladimir Naumenko

Faculty: Faculty of Economic Sciences

Educational Programme: Financial Markets and Financial Institutions (Master)

Year of Graduation: 2017

This research focuses on the measurement of the risk of trading portfolios resulting from the execution of various strategies using repo transactions. The following options for trading portfolios are considered: speculative portfolios (consisting of short or long positions on bonds), the riskiest portfolios (containing a combination of long and short positions on various bonds), as well as portfolios of the dealer (market maker) in the repo market. The aim of the study is to propose an approach of stress-testing of repo portfolios, which takes into account not only the features of each of the portfolio structures, but also the use of the financial leverage by the market participant. It was demonstrated that even if there are so-called "risk-free" bonds in the portfolio of direct and reverse REPO transactions, the use of borrowed funds contributes to the emergence of a high market risk that exceeds the discount on bonds that can be diagnosed by the proposed stress-testing approach. This fact confirms the importance of carrying out stress-testing by financial organizations.

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