Stress Test Implementation
Stress tests are exercises to determine the losses that might occur under unlikely but plausible circumstances.
“Stress and scenario testing should form a key part of a suite of tools used by a firm’s senior management in making integrated business strategy, risk management and capital planning decisions.” FSA CP08/24
A traditional approach to stress testing
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HOW WOULD YOUR PORTFOLIO BEHAVE UNDER STRESS?
It is now commonly accepted that VaR does not capture tail risk successfully.
Complex portfolios, whatever their strategies, are very sensitive to extreme market moves because illiquidity, non-linear exposures combined with leverage could amplify bad events.
Therefore, there is no sound risk management without a well-thought stress testing methodology.
Even then, would you be able to answer these questions:
- What types of stresses could cause your business model to fail or your investors to withdraw their funds?
- Which stress test should you “believe” in?
We can help you find the answers.