The Banker’s Handbook on Credit Risk: Implementing Basel II

A related feature is sensitivity analysis. Whereas tornado analysis (tornado charts and spider charts) applies static perturbations before a simulation run, sensitivity analysis applies dynamic perturbations created after the simulation run. Tornado and spider charts are the results of static perturbations, meaning that each precedent or assumption variable is perturbed a preset amount one at a time, and the fluctuations in the results are tabulated. In contrast, sensitivity charts are the results of dynamic perturbations in the sense that multiple assumptions are perturbed simultaneously and their interactions in the model and correlations among variables are captured in the fluctua-tions of the results. Tornado charts therefore identify which variables drive the results the most and hence are suitable for simulation, whereas sensitivity charts identify the impact to the results when multiple interacting variables are simulated together in the model. This effect is clearly illustrated in Figure 4-26. Notice that the ranking of critical success drivers is similar to the tornado chart in the previous examples. However, if correlations are added between the assumptions, Figure 4-27 shows a very different picture. Notice, for instance, that price erosion had little impact on NPV, but when some of the input assumptions are correlated, the interaction that exists between these correlated variables increases the impact of price erosion. Note that tornado analysis cannot capture these correlated dynamic relationships. Only after a simulation is run will such relationships become evident in a sensitivity analysis. A tornado chart s presimulation critical success...