Introduction to Applied Stress Testing

76 Pages Posted: 19 Mar 2007

See all articles by Martin Čihák

Martin Čihák

World Bank; International Monetary Fund (IMF)

Date Written: March 2007


Stress testing is a useful and increasingly popular, yet sometimes misunderstood, method of analyzing the resilience of financial systems to adverse events. This paper aims to help demystify stress tests, and illustrate their strengths and weaknesses. Using an Excel-based exercise with institution-by-institution data, readers are walked through stress testing for credit risk, interest rate and exchange rate risks, liquidity risk and contagion risk, and are guided in the design of stress testing scenarios. The paper also describes the links between stress testing and other analytical tools, such as financial soundness indicators and supervisory early warning systems. Furthermore, it includes surveys of stress testing practices in central banks and the IMF.

JEL Classification: G10, G20

Suggested Citation

Cihak, Martin and Cihak, Martin, Introduction to Applied Stress Testing (March 2007). Available at SSRN: or

Martin Cihak (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

World Bank ( email )

1818 H Street NW
Washington, DC 20433
United States

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