What is Stress Testing? | Financial Risk Manager Video Training | FRM Tutorial Video Video Lecture | Risk Management: An Essential Training - Management

simply learn your pace your place
financial risk manager par one of the
frm exam covers the fundamental tools
and techniques used in risk management
and the theories that underlie their use
stress testing
welcome to the fifty-third session in
your preparation for the frm part-1 exam
this is going to be the first part of
the last topic on stress testing we have
earlier pointed out the limitations of
var methods in that they do not capture
rare catastrophic events add potatoes
stress testing allows us to analyze the
impact of large changes in any input
variable on the portfolio
let us begin the session
agenda the main agenda of our discussion
will be learning about stress testing
and its application in managing
financial risk we will begin by learning
about the role of stress testing we will
then learn about scenario analysis and
sensitivity tests a method to calculate
margin in a derivatives market or span
will be studied briefly we will also
learn about various approaches to
scenario analysis
additionally the differences between
stress testing and sensitivity analysis
will be highlighted finally we will end
the session with a brief discussion on
the applications of stress testing
role of stress testing as we have
learned earlier the major drawback of
the traditional var measures is that
they do not capture the impact of rare
catastrophic events where the magnitude
of losses are unknown we have also
learned that the return distributions do
not have true normal distributions but
exhibit fat tails this drawback
seriously affects our estimate of the
reserve required in scenarios of
distress stress testing overcomes this
problem it creates a stress scenario by
changing the input variables and then
analyzing the impact of the change as
such the impact of potential
catastrophic events is also captured the
portfolio value for the extreme value of
the input is thus determined in that it
allows us to accurately predict the
reserve capital needed in times of
distress
scenario analysis scenario analysis can
be distinguished on the basis of what
drives the scenario or on the basis of
the number of dimensions in which the
input