Stress Testing Of Firm Level Credit Risk
Author(s) Kriti Mahajan, Manjusha Senapati and Anand Srinivasan


This paper develops a method to estimate vulnerability of publicly traded firms to stress events using a bottom up framework. As an illustration of the method, we apply this method to publicly traded firms in India. Specifi-cally, a given firm’s exposure to overall market risk (measured using NIFTY 500 returns) and the Indian market’s overall exposure to global market, forex and interest rate risk is used to estimate the sensitivity of firm level probabili-ties of default to changes in global market, foreign exchange rates and/or inter-est rates. Using this stress test methodology, the paper illustrates the impact of stress scenarios on corporate vulnerability - using the 2008 financial crisis and the 2013 taper tantrum as benchmark cases. The above stress test framework can be easily implemented for any combination of forex, market and interest rates scenarios to examine the impact of stress events on the probabilities of default of their obligors.

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