Hey all, Would anyone be able to shed some light on key distinctions between the two? I understand stress testing is a form of scenario analysis, but is it just an exaggerated scenario analysis? I just asked a charter holder at work and he said “it’s when you kick the variables up to 11.” Sufficient answer?
lol no charter holder is specific enough scenario testing is akin to saying what if war break out in the Saudi Arabia ( for example ) how will variables change and it affect the model/portfolio stress testing is just moving the price of oil to various extremes to see the effect on the model/portfolio
broad definition = scenario testing only changes one variable and holds all others constant, so it is simple to do but it is unrealistic because it doesnt measure what would happen if more than one variable changed stress testing is moving all variables and analyzing what would happen note there are three types of each (reading 40)
mcap11 scenario testing involves one or multi variableS? i say multi u say one …can someone clear this up plz other than that i agree with the rest of what u said
Scenario is multiple (i.e. whole scenario changes). Stess is one.
if scenario=sensitivity analysis, then one variable is manipulated, not sure about the nomenclature
I dont think scenario equals sensitivity. (however, i do think i was mixing up sensitivity with “stress test” in my earlier comment.) Scenario changes multiple variables, Sensitivity is one. Both are types of stress tests.
pimpineasy Wrote: ------------------------------------------------------- > mcap11 > > scenario testing involves one or multi variableS? > > i say multi u say one …can someone clear > this up plz > > other than that i agree with the rest of what u > said Both scenario and stressing models can involve multiple variables - major point (when using multiple variables) is that scenario applies shocks sequentially whereas stressing models apply them simultaneously…
I think thats the best explanation if its correct
Stress Testing is normally employed as a complement to VAR, it measures the impacts of unusual events that may not be reflected in your typical VAR calculation. There are two forms of stress testing, Scenario analysis and Stressing models
Honestly, I don’t think semantics is too important. The key is to stress individual variables to see what happens, if, for example, stocks go down 20% or the yield curve shifts by 1%. Then look at some historical events and create some hypothetical events or do loss maximization.
Thanks guys, I think I have the gist, though I sense some uncertainty amongst the group as well. happy studying
According to what I understand the major difference is: Scenario Analysis: How a portfolio will perform, given various changes, during a SPECIFIC period of time Stress testing: How a portfolio will perform, given various changes, during a FINANCIAL CRISIS or MAJOR DISASTERS