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ERM Glossary: Stress testing

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Stress testing involves analysing the impact on a firm’s portfolio of a shock to a set of well-defined market prices (or economic factors), for example a given fall in an equity index. Multiple stress events are often referred to as a scenario. The term stress testing is also employed to indicate the impact on a risk calculation such as the estimation of a VaR using inputs associated with a particularly bad outcome for the firm’s portfolio, for example an increase in the assumed level of correlation.

 

Usually, stress testing would focus on adverse shocks, i.e. downside risk.

 

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

 


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