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Can macro variables used in stress testing forecast the performance of banks?


  • Luca Guerrieri
  • Michelle Welch


When stress tests for the banking sector use a macroeconomic scenario, an unstated premise is that macro variables should be useful factors in forecasting the performance of banks. We assess whether variables such as the ones included in stress tests for U.S. bank holding companies help improve out of sample forecasts of chargeoffs on loans, revenues, and capital measures, relative to forecasting models that exclude a role for macro factors. Using only public data on bank performance, we find the macro variables helpful, but not for all measures. Moreover, even our best-performing models imply bands of uncertainty around the forecasts so large as to make it challenging to distinguish the implications of alternative macro scenarios.

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  • Luca Guerrieri & Michelle Welch, 2012. "Can macro variables used in stress testing forecast the performance of banks?," Finance and Economics Discussion Series 2012-49, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2012-49

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    References listed on IDEAS

    1. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    2. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
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    Cited by:

    1. Covas, Francisco B. & Rump, Ben & ZakrajŇ°ek, Egon, 2014. "Stress-testing US bank holding companies: A dynamic panel quantile regression approach," International Journal of Forecasting, Elsevier, vol. 30(3), pages 691-713.
    2. Hirtle, Beverly & Kovner, Anna & Vickery, James & Bhanot, Meru, 2016. "Assessing financial stability: The Capital and Loss Assessment under Stress Scenarios (CLASS) model," Journal of Banking & Finance, Elsevier, vol. 69(S1), pages 35-55.
    3. Pritsker, Matthew, 2017. "Choosing Stress Scenarios for Systemic Risk Through Dimension Reduction," Risk and Policy Analysis Unit Working Paper RPA 17-4, Federal Reserve Bank of Boston.

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