Christophe Hurlin, Quentin Lajaunie, Yoann Pull
arXiv 7 Jan 2026 · Econometrics
arXiv:2601.03983 · PDF · DOI · OpenAlex · Extracted main text
This paper proposes a formal framework for reverse stress testing geopolitical risk in corporate credit portfolios. A joint macro-financial scenario vector, augmented with an explicit geopolitical risk factor, is mapped into stressed probabilities of default and losses given default. These stresses are then propagated to portfolio tail losses through a latent factor structure and translated into a stressed CET1 ratio, jointly accounting for capital depletion and risk-weighted asset dynamics. Reverse stress testing is formulated as a constrained maximum likelihood problem over the scenario space. This yields a geopolitical point reverse stress test, or design point, defined as the most probable scenario that breaches a prescribed capital adequacy constraint under a reference distribution. The framework further characterises neighbourhoods and near optimal sets of reverse stress scenarios, allowing for sensitivity analysis and governance oriented interpretation. The approach is compatible with internal rating based models and supports implementation at the exposure or sector level.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Paul Glasserman and Chulmin Kang and Wanmo Kang (2015) Stress scenario selection by empirical likelihood | 1.000 | 5 | 4 | 100% |
| 2 | Pesenti, S. M. and Millossovich, P. and Tsanakas, A (2019) Reverse sensitivity testing: What does it take to break the model? | 0.843 | 3 | 3 | 100% |
| 3 | Caldara, Dario and Iacoviello, Matteo (2022) Measuring Geopolitical Risk | 0.843 | 3 | 3 | 100% |
| 4 | ECB (2025) ECB to assess banks' stress testing capabilities to capture geopolitical risk | 0.737 | 3 | 2 | 100% |
| 5 | Grundke, Peter and Pliszka, Kamil (2018) A macroeconomic reverse stress test | 0.737 | 3 | 2 | 100% |
| 6 | BCBS (2018) Stress testing principles | 0.644 | 2 | 2 | 100% |
| 7 | ECB (2025) 2025 Stress test of euro area banks – Final results | 0.644 | 2 | 2 | 100% |
| 8 | Kopeliovich, Yaacov and Novosyolov, Arcady and Satchkov, Daniel and… (2015) Robust Risk Estimation and Hedging: A Reverse Stress Testing Approach | 0.644 | 2 | 2 | 100% |
| 9 | Boyd, Stephen and Vandenberghe, Lieven (2004) Convex optimization | 0.644 | 2 | 2 | 100% |
| 10 | BCBS (2009) Principles for sound stress testing practices and supervision | 0.511 | 2 | 1 | 100% |
Showing the top 10 of 38 scored citations.