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Stress Test Robustness: Recent Advances and Open Problems

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This paper reviews recent advances made in improving the robustness of stress-testing models against potential misspecification or risk-factor-distribution misestimation, including conceptual advances in measuring robustness against pricing-model misspecification. In addition, we address an important open problem of stress tests as they are carried out today: the endogeneity of financial risks. Traditional stress-testing frameworks model a single-person decision problem in the face of an exogenous source of risk. Yet financial risks arise from the complex interaction between individuals, firms and financial institutions. A stress-testing framework that falls short of incorporating this risk endogeneity will ultimately only be able to capture the financial stress of individual institutions in a non-crisis environment.

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  • Thomas Breuer & Martin Summer, 2013. "Stress Test Robustness: Recent Advances and Open Problems," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 25, pages 74-86.
    • Handle: RePEc:onb:oenbfs:y:2013:i:25:b:3
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    More about this item

    Keywords

    stress testing; financial stability; systemic risk; robustness;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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