Reverse stress test

CFA Level II
#1

Is there a difference between a “Reverse Stress Test” and a “Stress Test”?

#2

Yes.

#3

:wink:

#4

https://www.moodysanalytics.com/risk-perspectives-magazine/stress-testing-europe/approaches-to-implementation/is-reverse-stress-testing-a-game-changer

#5

Recent example I did at work. Stress test: you increase COGS by 5% and see what happens Reverse Stress test: you first look at what level of COGS drives your operating profit below a threshold (using goal seek in Excel), and then run additional stress tests.

#6

Reverse stress test is used to determine wether a particular stress test is valid and is still appropriate as a risk measure tool.

#7

Stress Test: Event > Effect on risk factors > effect on portfolio

Reverse Stress Test: Risk factors> Hypothetical Event> Effect on portfolio