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.