EconPapers    
Economics at your fingertips  
 

Backtesting macroprudential stress tests

Amanah Ramadiah, Daniel Fricke () and Fabio Caccioli

Journal of Economic Dynamics and Control, 2022, vol. 137, issue C

Abstract: Macroprudential stress tests generate a wide range of stress outcomes, depending on the chosen input parameters. Building on the concept of reverse stress tests, we embrace this parameter sensitivity in a backtesting exercise. We generalize an otherwise standard model of price-mediated contagion by interpolating between different liquidation dynamics among banks (leverage targeting vs. threshold dynamics). We then test the capability of this model to match actual bank non-/defaults in the United States for the years 2008–10, where we treat the underlying liquidation dynamics as another free input parameter. While the model performance depends on the type of shock being imposed, we find that all liquidation dynamics we consider can explain to some extent (in particular better than a random benchmark) the pattern of defaults observed during the subprime crisis. We identify the region in the parameter space where a specific dynamic leads to the best fit of the data, and in the most relevant regime (illiquid asset markets and small initial shocks) leverage targeting turns out to provide the most accurate results. We also show how the results depend on the initial shock level, the market impact parameter, on the number of asset liquidation rounds, and the chosen liquidation functions.

Keywords: Systemic risk; Fire sales; Common asset holdings; Backtesting (search for similar items in EconPapers)
JEL-codes: G01 G11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188922000380
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Backtesting macroprudential stress tests (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000380

DOI: 10.1016/j.jedc.2022.104333

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2022-09-21
Handle: RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000380