Imagine that a team of risk assessment experts is independently reviewing a recent stress test conducted by a financial institution. In their evaluation process, they are scrutinizing both the stress testing models used and the assumptions that these models are based on. As part of their review, they uncover various potential problems. Which among these identified issues should the analysts consider as the most critical flaw related to the stress testing models or their underlying assumptions?

Exam-Like

Relationships between core and peripheral variables in the model are found by regressing their past behavior during stressed market conditions only.

15.2%

Credit risk losses are modeled by mapping historical default rate data provided by credit rating agencies to estimates of gross domestic product.

19.2%

The stress test does not account for the likely responses of other financial institutions to changes in the core variables of the test.

53.5%

A scenario used in the stress test was developed using reverse stress testing.

12.1%

Financial Risk Manager Part 1