WHAT’S THE DIFFERENCE BETWEEN SCENARIOS AND STRESS TESTING?

A typical description of scenario analysis and stress testing is the identification and analysis of the potential vulnerability of a firm to exceptional but plausible events. Other descriptions mention a combination of events which have a low probability of occurrence, but are realistic.

Stress testing is generally described as the shifting of a single parameter. In a risk context, this can be taken to refer to either the occurrence of a single risk, such as internal fraud or a system failure, or to the movement of a macroeconomic factor which may affect or does affect the firm as a whole, such as a significant increase in interest rates or a significant equity market downturn.

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