Stress test (financial)

A stress test, in financial terminology, is an analysis or simulation designed to determine the ability of a given financial instrument or financial institution to deal with an economic crisis. Instead of doing financial projection on a "best estimate" basis, a company or its regulators may do stress testing where they look at how robust a financial instrument is in certain crashes, a form of scenario analysis. They may test the instrument under, for example, the following stresses:

• What happens if unemployment rate rises to xx% in a specific year?
• What happens if equity markets crash by more than x% this year?
• What happens if GDP falls by z% in a given year?
• What happens if interest rates go up by at least y%?
• What if half the instruments in the portfolio terminate their contracts in the fifth year?
• What happens if oil prices rise by 200%?