Modelling Scenario Analysis and Macro Stress-testing
AbstractMacro stress-testing has become an important tool to assess financial stability. This paper describes a tool kit for scenario analysis and macro stress-testing. It is based on a model which maps multivariate scenarios to banks' credit and interest rate risks by deterministic and stochastic simulations. Our approach is an extension of existing macro stress-testing models as it distinguishes between probability of default on the one hand and loss given default on the other and allows for separate models for domestic and foreign portfolios. Another contribution of the paper is that the stochastic simulations generate loss distributions which provide insight in the extreme losses and allow for changing correlations between risk factors in stress situations. The methodology is applied to the Dutch banking sector.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 119.
Date of creation: Nov 2006
Date of revision:
banking; financial stability; stress-tests; credit risk; interest rate risk;
Find related papers by JEL classification:
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-16 (All new papers)
- NEP-BAN-2006-12-16 (Banking)
- NEP-CMP-2006-12-16 (Computational Economics)
- NEP-MAC-2006-12-16 (Macroeconomics)
- NEP-RMG-2006-12-16 (Risk Management)
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