*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow Rick Nason on Twitter/* [1]
*/Follow RSD Solutions on Twitter/* [2]
Stress testing is a key tool in risk management. However it seems that the
only stress testing that is done is on the down side. Hardly anyone checks
to see what the extreme situation upside is. But guess what, extreme
upsides also happen.
I firmly believe, for many reasons that I have written about before, that the
job of risk management is to "manage so as to increase the probability and
magnitude of good risk events happening while also managing so as to decrease
the probability and severity of bad risk events happening". Risk
management needs to manage both the upside and the downside.
It only makes sense to test risk strategies to see how they do under extreme
conditions on the downside as well as the upside. Two different risk
strategies can be equally effective at managing the extreme downside, but if
one allows for a better upside, would you not want to know that?
[1] https://twitter.com/rnason_dal
[2] https://twitter.com/rsdsolutions
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