Effective stress testing and scenario analysis in the “What-If” sense have become critical elements of the risk management process in the wake of geopolitical and macro-economic uncertainties and crises across the spectrum of credit, market, and operational risk. Such analysis can be purely qualitative or, at the other end, strongly quantitative. A hybrid approach may often make the most sense, resulting in scenarios and consequent stress analysis, across likelihood and impact axes, for senior management consideration and decision-making.

RiskCounts has created an exhaustive list of financial market risk factors and their sub-components. Fundamental risks are categorized by the nature of their origin and frequency of occurrence as Transactional Risk, and Operational/episodic Risk, developed as a “RiskCounts Functional Taxonomy of Risk Factors” and a RiskCounts “Glossary of Risk”. Each fundamental risk category is sub-divided into the more familiar generic risks: Market, Credit, Liquidity, Operational, etc. Analysis may include calculation of periodic rolling returns, variance of returns for a range of scenarios (e.g., business-as-usual to historical worst case) and the maximum draw-downs for a number of actual historical stress events (e.g., Black Monday, 9/11 and the Lehman crisis).