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Measuring Financial Stability: Applying the MfRisk Model to the Netherlands

  • Jan Willem van den End
  • Mostafa Tabbae

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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File URL: http://www.dnb.nl/binaries/Working%20Paper%2030_tcm46-146687.pdf
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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
Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/

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  1. 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.
  2. 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.
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