Despite the general consensus that stress testing has been useful in financial and macro-prudential regulation, test techniques are still being debated. This paper proposes using robust forecasting analysis to construct adverse scenarios using a benchmark model that includes a modified worst-case distribution. These scenarios give regulators a way to identify vulnerabilities, while acknowledging that models may be misspecified in unknown ways.
McKenna, Andrew, and Rhys Bidder. 2015. “Robust Stress Testing,” Federal Reserve Bank of San Francisco Working Paper 2015-13. Available at https://doi.org/10.24148/wp2015-13