Calibrating Initial Shocks in Bank Stress Test Scenarios: An Outlier Detection Based Approach
AbstractWe propose a rigorous and flexible methodological framework to select and calibrate initial shocks to be used in bank stress test scenarios based on statistical techniques for detecting outliers in time series of risk factors. Our approach allows us to characterize not only the magnitude, but also the persistence of the initial shock. The stress testing exercises regularly conducted by supervisors distinguish between two types of shocks, transitory and permanent. One of the main advantages of our framework, particularly relevant as regards the calibration of transitory shocks, is that it allows considering various reverting patterns for the stressed variables and informs the choice of the appropriate stress horizon. We illustrate the proposed methodology by implementing outlier detection algorithms to several time series of (macro)economic and financial variables typically used in bank stress testing.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 426.
Length: 52 pages
Date of creation: 2013
Date of revision:
Stress testing; Stress scenarios; Financial crises; Macroprudential regulation.;
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-30 (All new papers)
- NEP-BAN-2013-03-30 (Banking)
- NEP-CBA-2013-03-30 (Central Banking)
- NEP-RMG-2013-03-30 (Risk Management)
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