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Policy uncertainty and bank stress testing

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  • Kupiec, Paul H.

Abstract

The accuracy of dynamic stress-test capital models remains undocumented. Three methodologies: a CLASS-style approach, Bayesian model averaging, and a Lasso specification are used to forecast the performance of 14 large US banks during the financial crisis. Individual bank models are calibrated using bank historical data while regulatory models are calibrated using representative bank data. Representative bank model forecasts differ dramatically from the forecasts from bank-specific models and from actual outcomes. The Lasso methodology is most accurate, but its superiority may be sample-specific and is only apparent ex post. The results highlight the policy uncertainty inherent in regulatory stress tests.

Suggested Citation

  • Kupiec, Paul H., 2020. "Policy uncertainty and bank stress testing," Journal of Financial Stability, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finsta:v:51:y:2020:i:c:s1572308920300607
    DOI: 10.1016/j.jfs.2020.100761
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    References listed on IDEAS

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    Cited by:

    1. Paul Glasserman & Mike Li, 2025. "Should Bank Stress Tests Be Fair?," Management Science, INFORMS, vol. 71(1), pages 262-278, January.
    2. repec:aei:rpaper:008586461 is not listed on IDEAS
    3. Mai Dao & Lam Nguyen, 2025. "Variable selection in macroeconomic stress test: a Bayesian quantile regression approach," Empirical Economics, Springer, vol. 68(3), pages 1113-1169, March.
    4. Avi Lichtig & Helene Mass, 2024. "Optimal Testing in Disclosure Games," CRC TR 224 Discussion Paper Series crctr224_2024_543, University of Bonn and University of Mannheim, Germany.

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    More about this item

    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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