ABSTRACT
In this paper, we discuss impact of the Covid-19 pandemic on the North American financial markets and propose a framework for stress testing and financial scenario generation of market indicators. This framework includes the following main components: Epidemiological dynamic model describing evolution of the number of Susceptible, Infected, Recovered and Death cases with social distancing,Dynamical model describing dependence between financial indicators and growth of the pandemic in different geographical areas,Conditional stress scenario generation and financial portfolio analysis. We apply an extended epidemiological model to analysis of Covid-19 pandemic spread and analyze its impact on some of the main financial indicators, including stock indices, credit spreads and FX rates, and characteristics of the pandemic process in different geographical areas. This analysis results in a model connecting the dynamics of the pandemic and that of the main financial indicators. The model allows one to generate pandemic scenarios under different assumptions on the parameters of the infectious disease and that of the social distancing policies. Once the pandemic scenarios are generated, one can transform them into a set of scenarios on macro-economic risk factors. Then, applying the conditional scenario technique we obtain a set of Monte Carlo scenarios on the risk factors driving the portfolio dynamics. The proposed dynamic models allow one to generate various financial stress scenarios on market indicators and compute the distribution of financial portfolio losses and their risk measures. © 2021, The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.