Modelling interrelated shocks will improve stress tests – research

Call for regulators to ditch standard scenarios for more sensitive approach

Regulators should scrap standard stress scenarios in favour of a set of tests that measure how economic shocks interact – an approach that would also help them model the likely effect of their own intervention, two researchers say. Although the approach is computationally intensive, the academics say rapid advances in technology should enable this more comprehensive method to model real-world stress events.

In a paper due to be published in the Journal of Risk later this year, Dror Parnes of