- The first type is based on actual crisis “Historic Scenarios”. These represent such events as the 1987 stock market crisis, the 1998 Russia/LTM crisis or the 2000 Internet stock bubble. In these scenarios, we simulate the effect on profit or loss of repeats of past historical events.

- The second type of stress testing is “Stress Scenarios”, uses predefines scenarios that have proven to be useful in practice. These are defined by the user and generally represent step moves in the market such as a 100 bps shift of the yield curve, or a 10 bps shift of government spread curve.

- The third types are mechanical-search stress tests. These use automated routines to cover prospective changes in risk factors, evaluate P/L under each set of risk-factor changes, and report the worst-case results.

The key challenge posed by stress testing is that stress tests are inevitably subjective because they depend on scenarios chosen by the stress tester. As a result, the value of

Stress testing depends critically on the choice of scenarios and therefore on the skill of the modeler.

A related problem is that the results of stress tests are difficult to interpret because they give us no idea of the probabilities of the events concerned, and in the absence of such information we often don’t know what to do with them.

Our expertise on Stress testing and back testing covers the following areas:

- Design and Implementation of Stress testing strategy

- Calculation of a clean P/L for the purpose of back testing VAR Models

- Design and Implementation of a back testing strategy

- Integration of stress test scenarios into a VAR calculation