Constructing stress tests

Abstract

Purpose

There is limited discussion in the literature of the problems associated with constructing stress tests. The Credit Crunch has revealed that attention simply to haircuts to asset values and resulting margin calls is insufficient. The purpose of this paper is to explore additional avenues for stress testing.

Design/methodology/approach

The paper is largely discursive.

Findings

Stress tests must look into the debt position of the firm, as well as its position and credit exposures. Not only the volume of debt but its maturity structure, callability and the indentures attached to it are extremely important.

Research limitations/implications

The paper is geared more toward management and practitioners than to academic researchers. Implications for the analysis of corporate strategy are significant.

Social implications

Stress testing is essential to the confident continuance of firms.

Originality/value

So much of the work in this area is proprietary and so little has been published on it.

Citation

Abbink, J.B. (2011), "Constructing stress tests", Journal of Risk Finance, Vol. 12 No. 5, pp. 421-434. https://doi.org/10.1108/15265941111176154