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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