Stress testing and financial risks

Lyes Koliai

in Economics Thesis from University Paris Dauphine from Paris Dauphine University

Abstract: This thesis has set a comprehensive framework to assess the relevance of financial stress tests, identifying their main drawbacks. Three robust and flexible model frameworks have been proposed to improve current practices in each of the tests’ stages. This is achieved through: (i) a semi-parametric EVT–Pair-copulas model for financial risk factors, with a specific focus on extreme values, (ii) a valuation model to assess the impact of risk factors on a financial system, through direct and indirect effects, contagion channels, and considering private and public response functions, and (iii) a Bayesian-based approach to run a systematic selection of stress scenarios for nonlinear portfolios. The presented risk model has proven to outperform commonly used specifications, hence increasing the test’s credibility. Estimated for the French banking system, the valuation model revealed the related risk profile and the main vulnerabilities. Public responses turned to be of vital interest. Finally, the Bayesian approach allows replacing the traditional subjective scenarios and including the tests’ results in quantitative risk management alongside with other conventional tools

Keywords: Stress tests; Scénario; Tve; Copules-Paires; Risque systémique; Gestion des risques; Inférence bayésienne; Stress testing; Scenario; Evt; Pair-Copulas; Systemic risk; Risk management; Bayesian inference (search for similar items in EconPapers)
JEL-codes: C32 C5 D85 G11 G17 G21 G28 G32 G33 (search for similar items in EconPapers)
Date: 2014 Written 2014
Note: dissertation
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