Practitioner course in risk management
Stress Testing
How to design and run stress tests on a portfolio: historical and hypothetical scenarios, shocking risk factors consistently, reverse stress testing, liquidity effects, and presenting results that lead to decisions.
Stress testing asks a direct question: what would this portfolio lose if a particular bad thing happened? Unlike value at risk, it does not depend on a model of how likely the event is. That makes it the main tool for thinking about losses beyond what recent data shows.
How do you design a good stress scenario?
Start from a story with a cause, such as a sharp rise in rates or a credit event, and translate it into shocks to every relevant risk factor in a way that is internally consistent. Historical episodes give realistic patterns of co-movement; hypothetical scenarios cover events that have not happened yet. The course covers both and how to judge whether a scenario is severe enough.
What is a reverse stress test?
It works backwards: fix a loss that would be unacceptable, then search for the most plausible scenarios that produce it. It often reveals concentrations that forward scenarios miss. You will run one on a sample portfolio.
Who is this course for?
Risk analysts, portfolio managers and anyone who reports risk to a committee or board. It counts toward the Certificate in Quantitative Risk Management.
What you will be able to do
- Design historical and hypothetical stress scenarios for a portfolio.
- Translate a scenario into consistent shocks across risk factors.
- Run a reverse stress test to find the scenarios that cause a given loss.
- Include liquidity and correlation breakdown in a stress test.
- Report stress results with clear assumptions and actions.
Syllabus, module by module
Why stress test
What VaR misses, and the role of stress tests in risk management and regulation.
Historical scenarios
Replaying 1987, 1998, 2008, 2020 and other episodes on today's portfolio.
Hypothetical scenarios
Narrative design, plausibility and severity.
Factor shocks
Mapping a scenario to rates, spreads, equities, currencies and volatility, consistently.
Reverse stress testing
Searching for the most plausible scenario that produces a given loss.
Liquidity and second-round effects
Forced selling, margin calls and correlations that change in a crisis.
Reporting
Presenting results, assumptions and actions to decision-makers.
How the certificate is earned
An assessed project: you design a set of stress scenarios for a given portfolio, run them, including one reverse stress test, and submit the code with a written report to a risk committee. On a pass you receive the Course certificate in Stress Testing, issued by the Institute with a verification code. Read how certification works.
Before you start
Working Python and the material of Value at Risk.
This course counts toward
Questions applicants ask
What is the difference between stress testing and VaR?
VaR estimates a loss level from a statistical model of normal variation. A stress test asks what happens under a specific severe scenario, whether or not the model thinks it likely. The two answer different questions and are used together.
Does the course cover regulatory stress tests?
It explains how supervisory stress tests are structured in outline. The focus is the method, which applies to portfolios of any size, not the reporting templates of a particular regulator.