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Measuring Financial Stability: Applying the MfRisk Model to the Netherlands

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  • Jan Willem van den End
  • Mostafa Tabbae

Abstract

Models which integrate various financial stability risks are still in an early stage of development. In this paper we use the Macrofinancial Risk model (MfRisk) to construct a measure for financial stability. MfRisk applies the Merton option model in a multi-sector framework. We argue that this method satisfies the macro-prudential approach. On the basis of the MfRisk model we construct a system-wide financial stability measure for the Netherlands, which builds on the put options of the banking, insurance and pension sectors. This measure approximates the probability and the potential loss of stress in the financia l system. The measure is tested against various indicators of default risk, from which we conclude that it is a reliable proxy. Finally, it is shown how the measure can be used for stress testing.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 030.

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Date of creation: Mar 2005
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Handle: RePEc:dnb:dnbwpp:030

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Keywords: financial stability; default risk; option model;

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References

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  1. Brad Setser & Nouriel Roubini & Christian Keller & Mark Allen & Christoph B. Rosenberg, 2002. "A Balance Sheet Approach to Financial Crisis," IMF Working Papers 02/210, International Monetary Fund.
  2. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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Cited by:
  1. Dale F. Gray; & Robert C. Merton & Zvi Bodie, 2009. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," Working Papers Central Bank of Chile 541, Central Bank of Chile.
  2. Münür Yayla & Alper Hekimoglu & Mahmut Kutlukaya, 2008. "Financial Stability of the Turkish Banking Sector," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 2(1), pages 9-26.
  3. Albulescu, Claudiu Tiberiu, 2008. "Assessing Romanian financial sector stability: the importance of the international economic climate," MPRA Paper 16581, University Library of Munich, Germany, revised 12 Feb 2009.
  4. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.
  5. de Haan, Leo & Kakes, Jan, 2010. "Are non-risk based capital requirements for insurance companies binding?," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1618-1627, July.
  6. Michael T. Gapen & Dale F. Gray & Cheng Hoon Lim & Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 05/155, International Monetary Fund.
  7. Albulescu, Claudiu Tiberiu, 2008. "La dynamique de la stabilité du système financier roumain : une analyse en terme d’indice agrégé de stabilité
    [Romanian financial system dynamics: an aggregate stability index analysis]
    ," MPRA Paper 16754, University Library of Munich, Germany, revised 30 Jul 2008.

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