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Quantitative Methods & Risk·Value at Risk & Stress Testing
Stress Testing: Scenarios that Break VaR
10 min read
Where VaR fails, scenarios save you
Stress testing supplements VaR by asking a different question: 'If a specific historical or hypothetical event repeated, what would the portfolio lose?' You don't need a probability — you need a coherent scenario. This module covers the standard three shocks every desk runs: Lehman 2008, COVID March 2020, and the SNB EUR/CHF unpeg of January 2015.
| Scenario | Date | Headline shocks |
|---|---|---|
| Lehman default | Sept 15 2008 | S&P -9% / week, IG spread +200bp |
| COVID lockdown | Mar 9-23 2020 | S&P -34% in 23 days, VIX > 80 |
| SNB unpeg | Jan 15 2015 | EUR/CHF -30% in minutes, FX vol +400% |
Tip
Build your own scenario library
The standard playbook is a starting point. Every shop adds its own — for Markitel paper accounts, a useful one is 'flash crash on the asset I'm most concentrated in.' Run it monthly.