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PPNR Stress Test CCAR/DFAST Statistical Testing

Confirming Residual Normality — A Necessary Step of Only Modest Value

PPNR Stress Testing models are largely developed using linear regression analysis, a key assumption of which is that a model’s residuals are “normal” (roughly, that a histogram of the residuals is bell-shaped). In this Perspective, we describe residual normality, characterize the more popular tests for normality, and share our views on the proper testing framework. We also point out the reality that testing for residual normality is generally low value-add: understanding why residuals should be ...

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