Axioma: Stress Testing Best Practices
Posted: 17 July 2017 | Source: Axioma Inc.
Stress tests are designed to estimate the impact of adverse market movements on a portfolio. These market scenarios can be extreme but should always be plausible. For example, changes in monetary policy, increasing inflation, or political instability can be modeled as low-probability events. Meaningful stress tests provide a forward-looking assessment of risk, overcome limitations of simulation models, and help aid the development of risk mitigation techniques.