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Stress-testing financial systems: an overview of current methodologies

  • Marco Sorge

    (World Bank Group - International Finance Corporation)

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    This paper reviews the state-of-the-art of macro stress-testing methodologies. Substantial progress has been made both in the econometric analysis of financial soundness indicators and in the simulation of value-at-risk measures to assess system-wide vulnerabilities. However, a number of methodological challenges still remain concerning the correlation of market and credit risks over time and across institutions, the limited time horizon generally used for the analysis and the potential instability of reduced-form parameter estimates because of feedback effects. Further research in this area might also focus on how to use macro stress-testing techniques as an operational tool to incorporate financial stability considerations into monetary policy decision-making.

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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 165.

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    Length: 41 pages
    Date of creation: Dec 2004
    Date of revision:
    Handle: RePEc:bis:biswps:165
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