Stress tests have become an important tool in regulation and risk management of financial institutions. From formulation of stress scenarios, to evaluation of performance under the stress, and assessment of adequate capital under the stress, the ultimate regulatory goal is to assure stability in the financial sector.
Professor Robert Engle, Nobel Laureate and author of paper 'Climate Stress Testing', joined Paul Winter, 蜜豆视频 Global Head of Quantitative Research, to discuss the advantages and disadvantages of using market-based stress tests instead of solely relying on financial reporting when measuring portfolio exposure to climate risk.
Key takeaways
- Market-based climate stress tests are fast, non-invasive, comparable over a wide range of countries and time periods and can be updated every day.
- Results are a natural companion to more detailed supervisory measures, and can often be considered as forward-looking indicators.
- Dependence upon market evaluation of climate risks may be either a drawback or an advantage.
