Reverse Stress Testing, Bottom Up

14 Pages Posted: 24 Mar 2020 Last revised: 19 Apr 2023

See all articles by Claudio Albanese

Claudio Albanese

Global Valuation

Stéphane Crépey

Université d'Évry - Equipe d'Analyse et Probabilites

Stefano Iabichino

JP Morgan

Date Written: February 18, 2020


We propose a bottom-up quantitative reverse stress testing framework that identifies forward-looking fragilities tailored to a bank's portfolio, credit and funding strategies, models, and calibration constraints. Thus, instead of relying on historical events, we run a Monte Carlo simulation, and we mine those future states that contribute the most to a bank's cost of capital expressed in terms of scenario differential.
This approach allows identifying both the systemic and idiosyncratic weaknesses of the bank’s portfolio, with applications that include solvency risk, extreme events hedging, liquidity risk
management, trading and credit limits, model validation and model risk management.

Keywords: Model Validation, Stress Testing, Reverse Stress Testing, Capital Models, Risk Margins, Trading Limits, Cost of Capital, KVA, Model Risk, Short Rate Models, PFE

JEL Classification: D81, G13, G28, G32

Suggested Citation

Albanese, Claudio and Crépey, Stéphane and Iabichino, Stefano, Reverse Stress Testing, Bottom Up (February 18, 2020)., Available at SSRN: or

Claudio Albanese (Contact Author)

Global Valuation ( email )

9 Devonshire Sq.
London, London EC2M 4YF
United Kingdom

Stéphane Crépey

Université d'Évry - Equipe d'Analyse et Probabilites ( email )

Boulevard des Coquibus
F-91025 Evry Cedex

Stefano Iabichino

JP Morgan ( email )

United Kingdom

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