Assessing the effect on a portfolio or institution of extreme but plausible conditions. It covers what statistical models, built on normal times, tend to miss.
Where you will meet it
Stress testing comes up in 46 learning outcome notes across the FRM syllabus.
A few of them:
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Quantitative measures include standard deviation, sensitivities, value at risk, expected shortfall and stress tests.”
Measuring and Monitoring Volatility FRM Part I · Valuation and risk models
“Tail risk needs stress testing, heavier-tailed distributions, historical or simulated tails, or models of time-varying volatility.”
Credit Risk Management FRM Part II · Credit risk measurement and management
“Processes include validated rating systems and models, good data, management information, early-warning indicators, limit monitoring, portfolio reporting and stress testing.”
The Financial Stability Implications of Artificial Intelligence FRM Part II · Current issues in financial markets
“Risk management and stress testing, and customer service chatbots, are also established.”
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