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Measuring Financial Stability: Applying the MfRisk Model to the Netherlands

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  • Jan Willem van den End
  • Mostafa Tabbae

Abstract

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.

Suggested Citation

  • Jan Willem van den End & Mostafa Tabbae, 2005. "Measuring Financial Stability: Applying the MfRisk Model to the Netherlands," DNB Working Papers 030, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:030
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    File URL: https://www.dnb.nl/binaries/Working%20Paper%2030_tcm46-146687.pdf
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    References listed on IDEAS

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    1. 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.
    2. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, pages 14-31.
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    Citations

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    Cited by:

    1. de Haan, Leo & Kakes, Jan, 2010. "Are non-risk based capital requirements for insurance companies binding?," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1618-1627, July.
    2. Albulescu, Claudiu Tiberiu, 2008. "Assessing Romanian financial sector stability: the importance of the international economic climate," MPRA Paper 16581, University Library of Munich, Germany, revised 12 Feb 2009.
    3. Albulescu, Claudiu Tiberiu, 2008. "La dynamique de la stabilité du système financier roumain : une analyse en terme d’indice agrégé de stabilité
      [Romanian financial system dynamics: an aggregate stability index analysis]
      ," MPRA Paper 16754, University Library of Munich, Germany, revised 30 Jul 2008.
    4. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2007. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," NBER Working Papers 13607, National Bureau of Economic Research, Inc.
    5. Münür Yayla & Alper Hekimoglu & Mahmut Kutlukaya, 2008. "Financial Stability of the Turkish Banking Sector," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 2(1), pages 9-26.
    6. Michael T. Gapen & Dale F. Gray & Cheng Hoon Lim & Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 05/155, International Monetary Fund.
    7. Chun-peng Zhang & Rong Kang & Chen Feng, 2016. "Financial Vulnerability, Capital Shocks and Economic Growth: Evidence from China (2005—2014)," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 2(1), pages 23-31, November.
    8. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    financial stability; default risk; option model;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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