Learn / Risk & ALM

Market shocks

A market shock is a stated change you apply to a risk factor so you can see the book afterward. It is a what-if. It is not a forecast, and it is not an order to trade.

This page stays on the shape of the move. The dollar revaluation of assets, liabilities, and a hedge is the last lesson in the track, after duration and the instruments have names.

A parallel move is the simple case

Start from a flat curve at 4% on the 2-year, the 10-year, and the 30-year. A parallel shock of +100 basis points lifts every tenor to 5%. The slope does not change, because every point rose by the same amount. Duration, as a single number, is built for this kind of move.

Each panel starts from a flat 4% curve. The move is a classroom shock, not a forecast of the next Treasury auction.

Steepener, flattener, and twist

A steepener drops the short end and lifts the long end. In the classroom, the 2-year goes to 3.75% and the 30-year goes to 4.50%. The curve gets steeper. A flattener does the opposite: the 2-year goes to 4.50% and the 30-year goes to 3.50%.

A twist lifts both wings and leaves the belly. The 2-year and the 30-year go to 4.50%. The 10-year stays at 4%. A book that is hedged only for a parallel shift still feels this one, because the maturities did not share the move. Use the lab to read one shape at a time.

Teaching lab

Name the shape

Start from a flat 4% curve. Each button is one classroom shock. The lab names the shape. It does not revalue a book.

Every tenor rises by 1 percentage point. A 2-year move and a 30-year move are the same size.

2Y: 5.00%
10Y: 5.00%
30Y: 5.00%

Shocks that are not yields

A credit-spread shock widens or tightens the extra yield of a corporate bond. An equity shock moves a stock index. A volatility shock changes the width used to price options. An inflation shock changes the price index or the inflation priced into bonds. A liquidity shock is about whether you can trade the size you need at a tight price. It does not have to come with a yield change.

These four sit beside a rate shock. A combined scenario uses more than one of them at the same time.

A combined shock applies more than one of these at once. Historical versions reuse a past episode. Hypothetical versions are the ones you specify. Both belong on the stress testing page.