Quantitative reverse stress testing, bottom up

We propose a bottom-up quantitative reverse stress testing framework that identifies forward-looking fragilities tailored to bank's portfolio, credit and funding strategies, models, calibration constraints. Thus, instead of relying on historical events, we run Monte Carlo simulation, mine those future states contribute the most cost capital expressed in terms scenario differential. This approach allows identifying both systemic idiosyncratic weaknesses with applications include solvency risk, extreme events hedging, liquidity risk management, trading limits, model validation management.