Applied risk management series: Integrating stress tests with risk management

Stress testing is a vital part of successful risk management, but risk managers at energy trading firms frequently face obstacles in designing and implementing successful stress testing programmes. In this article, Carlos Blanco provides some advice on how they might be overcome

Risk managers at energy trading firms rely on a set of scenario-based ‘at-risk' metrics, such as value-at-risk or earnings-at-risk, to manage the risk profile of their organisations. These metrics reflect hypothetical market scenarios or possible states of the world, but they are often generated using assumptions of ‘normal' market behaviour, which do not fully capture risk under extreme market conditions. As a result, traditional risk management ends up focusing too much on day-to-day tactical