Stressing volatility

When stressing volatility in a VaR calculation it is important to be clear as to what
is being changed with respect to the real world. Often, when volatility is stressed in
a VaR calculation it is intended to imitate the effect of a market shock. If this is the
intention, then it is better to apply the price move implied by the stressed volatility
directly to the portfolio and measure its effect. Given that volatilities are calculated
as some form of weighted average price change over a period of time it is clear that
stressing volatility is an inappropriate way to simulate the effect of an extreme price
movement. Therefore, we should conclude that the change in VaR given by stressing
volatilities is answering the question ‘what would my day-to-day level of risk be if
volatilities changes to X ?’