MSCI: Modeling Future Shocks - Best Practices for Predictive Stress Tests

Stress testing has experienced a resurgence of interest in the aftermath of the 2008 global financial crisis. The lessons from that period, perhaps more than any previous one, taught the risk industry that expert judgment and economic insight may help investors anticipate and avoid exposure to major financial downturns by using forward-looking models.

But what are best practices for creating these forward-looking scenarios? Currently, there is no consensus.

As we see it, stress testing is

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