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Stress-testing financial systems: an overview of current methodologies


  • Marco Sorge

    (World Bank Group - International Finance Corporation)


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.

Suggested Citation

  • Marco Sorge, 2004. "Stress-testing financial systems: an overview of current methodologies," BIS Working Papers 165, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:165

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    References listed on IDEAS

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    More about this item


    Macro stress-testing; financial soundness indicators; value at risk; feedback effects;

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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