Reverse Stress Test - Solve for the Breakpoint
Conventional stress testing asks "what happens at this index level?" Reverse stress testing asks the question a risk committee actually needs: at what index level does this book breach its loss tolerance? Set the portfolio, the index, and the maximum tolerable loss; the console solves backwards for the breaking index value and reports how much headroom remains from today's reading.
Method & Sources
Reverse stress testing
Reverse stress testing is an established supervisory technique (Bank of England, EBA guidelines): rather than applying a scenario and reading the loss, it starts from a defined failure - here, a maximum tolerable portfolio loss - and identifies the scenario that produces it. Q-Stress applies this to a geopolitical shock, following the recent literature that models the geopolitical component as a scalar shock proxied by an observable index and is explicitly agnostic to the index chosen.
The mapping
Each sector carries a loss sensitivity (β): the portfolio loss per one-standard-deviation rise in the index is the exposure-weighted β. Inverting the loss equation gives the index deviation - and hence the index level - at which cumulative loss equals the tolerance. Headroom is the distance from today's reading to that breakpoint, expressed both in index points and in standard deviations.
Index-agnostic by design
Because the shock enters as a scalar deviation, any index meeting minimal requirements can drive the test - GPR, the geoeconomic register, EPU, or a blended Q-composite. This is the property that lets Q-Stress sit downstream of Q-GPR: the same series that Q-GPR overlays on exposures, Q-Stress inverts to a breakpoint.
Status
Sector betas and the loss-transmission coefficient are illustrative calibration placeholders; production release estimates them from sector return/spread data. Nothing here constitutes investment advice.