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Stress testing · Scenarios

A stress test needs a transmission path

A uniform revenue haircut is easy to run and hard to interpret. A useful stress test shows where a shock lands first and how it moves through cash flow and valuation.

Jason Zhao7 min read

Define the scenario before changing the model

This is a hypothetical stress test. State the move in rates, funding access, demand, currencies, or policy before selecting affected assets. Working backward from a desired output usually produces a vague scenario.

Record the sequence of effects

A shock may reach new orders first, then utilisation, margin, cash needs, and refinancing. Each link needs a likely delay and the operating response available to management.

Look for portfolio concentration and correlation

Adding asset-level losses is the first pass. Review whether common lenders, buyers, or exit windows can contract together.

  • Direct operating effect.
  • Capital structure and liquidity.
  • Valuation and exit market.
  • Second-order supplier or customer effect.

Precision does not remove scenario judgement

Decimal outputs do not make uncertain inputs more certain. I would retain the critical assumptions, sensitivity range, and paths that cannot be measured cleanly.