Reverse Stress Testing

22 Pages Posted: 24 Mar 2020 Last revised: 20 Sep 2021

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


This article outlines a framework for the analysis of extreme events based on forward-looking reverse stress testing. We perform a portfolio simulation and identify stress scenarios critical to the bank’s solvency. Stress scenarios are determined based on their contribution to the capital cost, as expressed by KVA scenario differentials. We find that reverse stress testing can identify both the systemic and idiosyncratic weaknesses of the bank’s portfolio without relying on historical events. Applications include solvency risk, extreme events hedging, liquidity risk management, trading and credit limits, model validation and model risk manage- ment.

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 (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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