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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