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Modelling Scenario Analysis and Macro Stress-testing

  • Jan Willem van den End
  • Marco Hoeberichts
  • Mostafa Tabbae

Macro stress-testing has become an important tool to assess financial stability. This paper describes a tool kit for scenario analysis and macro stress-testing. It is based on a model which maps multivariate scenarios to banks' credit and interest rate risks by deterministic and stochastic simulations. Our approach is an extension of existing macro stress-testing models as it distinguishes between probability of default on the one hand and loss given default on the other and allows for separate models for domestic and foreign portfolios. Another contribution of the paper is that the stochastic simulations generate loss distributions which provide insight in the extreme losses and allow for changing correlations between risk factors in stress situations. The methodology is applied to the Dutch banking sector.

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File URL: http://www.dnb.nl/binaries/Working%20Paper%20119_tcm46-146776.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 119.

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Date of creation: Nov 2006
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Handle: RePEc:dnb:dnbwpp:119
Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/

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  1. Marco Sorge, 2004. "Stress-testing financial systems: an overview of current methodologies," BIS Working Papers 165, Bank for International Settlements.
  2. J.A. Bikker & Haixia Hu, 2001. "Cyclical patterns in profits provisioning and lending of banks and procyclicality of the new basel capital requirements," Research Series Supervision (discontinued) 39, Netherlands Central Bank, Directorate Supervision.
  3. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, 2005. "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England.
  4. Gunnar Bårdsen & Kjersti-Gro Lindquist & Dimitrios P. Tsomocos, 2006. "Evaluation of macroeconomic models for financial stability analysis," Working Paper Series 6806, Department of Economics, Norwegian University of Science and Technology.
  5. Sorge, Marco & Virolainen, Kimmo, 2006. "A comparative analysis of macro stress-testing methodologies with application to Finland," Journal of Financial Stability, Elsevier, vol. 2(2), pages 113-151, June.
  6. Peura, Samu & Jokivuolle, Esa, 2003. "Simulation-based stress testing of banks’ regulatory capital adequacy," Research Discussion Papers 4/2003, Bank of Finland.
  7. Virolainen , Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Research Discussion Papers 18/2004, Bank of Finland.
  8. Maria Soledad Martinez Peria & Giovanni Majnoni & Matthew T. Jones & Winfrid Blaschke, 2001. "Stress Testing of Financial Systems; An Overview of Issues, Methodologies, and FSAP Experiences," IMF Working Papers 01/88, International Monetary Fund.
  9. Edward Altman & Andrea Resti & Andrea Sironi, 2004. "Default Recovery Rates in Credit Risk Modelling: A Review of the Literature and Empirical Evidence," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 33(2), pages 183-208, 07.
  10. Paul Louis Ceriel Hilbers & Matthew T. Jones & Graham L. Slack, 2004. "Stress Testing Financial Systems; What to Do When the Governor Calls," IMF Working Papers 04/127, International Monetary Fund.
  11. Jon Frye, 2000. "Depressing recoveries," Emerging Issues, Federal Reserve Bank of Chicago, issue Oct.
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