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ERM Glossary: Reverse Stress testing

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Reverse stress testing involves starting out with a specified outcome (typically that the firm’s business model becomes broken) and then working out:

 

-      Some potential scenarios which might be expected to give rise to this outcome (plausible conditional on the outcome actually materialising); and

 

-      What mitigating steps can be taken to reduce the likelihood of these scenarios occurring and/or their impact if they did materialise

 

For further information on reverse stress testing see here or refer to Market Consistency or Extreme Events.

 


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