Stress Test Robustness: Recent Advances and Open Problems

Thomas Breuer () and Martin Summer
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Thomas Breuer: Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.

Financial Stability Report, 2013, issue 25, 74-86

Abstract: This paper reviews recent advances made in improving the robustness of stress-testing models against potential misspecification or risk-factor-distribution misestimation, including conceptual advances in measuring robustness against pricing-model misspecification. In addition, we address an important open problem of stress tests as they are carried out today: the endogeneity of financial risks. Traditional stress-testing frameworks model a single-person decision problem in the face of an exogenous source of risk. Yet financial risks arise from the complex interaction between individuals, firms and financial institutions. A stress-testing framework that falls short of incorporating this risk endogeneity will ultimately only be able to capture the financial stress of individual institutions in a non-crisis environment.

Keywords: stress testing; financial stability; systemic risk; robustness (search for similar items in EconPapers)
JEL-codes: C02 G01 G28 G38 (search for similar items in EconPapers)
Date: 2013
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