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Stress Testing and Back Testing [27]

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Bullet points include: The past is not necessarily a good guide to the future. Markets not precisely defined external physical systems. Include feed-back loops in which we (the observers) are implicated. Magnitude of impact of a given scenario (relatively) easy to calculate. The challenge is how to identify the scenario’s likelihood. Regulators know this too. Stress testing focuses more on magnitude (if large and adverse), and what makes the scenario adverse, and pays less attention to likelihood

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