ERM Glossary: Scenario analysis
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Scenario analysis consists of the analysis of the impact on
the institution’s portfolio of exposures of a combined set of individual
movements in underlying exposures. A scenario might therefore include a given
shock to the yield curve accompanied by plausible additional impacts on term
structures in other countries and on equity markets.
Scenario analyses might be differentiated from stress tests
in two ways:
(a) A scenario
analysis would typically include a combination of different ‘stresses’; and/or
(b) The ‘stresses’ used in
a scenario analysis would not necessarily be adverse. Scenarios tested might
include favourable ones.
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