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Introduction to Applied Stress Testing

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  • Mr. Martin Cihak

Abstract

Stress testing is a useful and increasingly popular, yet sometimes misunderstood, method of analyzing the resilience of financial systems to adverse events. This paper aims to help demystify stress tests, and illustrate their strengths and weaknesses. Using an Excel-based exercise with institution-by-institution data, readers are walked through stress testing for credit risk, interest rate and exchange rate risks, liquidity risk and contagion risk, and are guided in the design of stress testing scenarios. The paper also describes the links between stress testing and other analytical tools, such as financial soundness indicators and supervisory early warning systems. Furthermore, it includes surveys of stress testing practices in central banks and the IMF.

Suggested Citation

  • Mr. Martin Cihak, 2007. "Introduction to Applied Stress Testing," IMF Working Papers 2007/059, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2007/059
    as

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=20222
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    References listed on IDEAS

    as
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    10. Jeremy Berkowitz, 1999. "A coherent framework for stress-testing," Finance and Economics Discussion Series 1999-29, Board of Governors of the Federal Reserve System (U.S.).
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    Full references (including those not matched with items on IDEAS)

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