A risk management technique that is used to estimate how a company’s portfolio would have performed under some of the most extreme market conditions observed in the last decade or couple of decades. For example, stress testing could involve measuring, in hindsight, the impact of an extreme movement in a country’s equity prices, by setting the percentage changes in all market variables equal to those on a specific market crash day.

To test the effect of extreme movements in local interest rates, for example, the company might set the percentage changes in all market variables equal to those on a specific date (such as that on which bond yields experienced high standard deviations). Stress testing may also draw its stressed performance benchmarks from senior management’s collective judgment on extreme scenarios that might occur given the current economic conditions.