Econometric Tools for Stress Testing Using Time Heterogeneity and Maximum Entropy

Hrishikesh Vinod

Chapter 25 in Handbook of Applied Investment Research, 2020, pp 661-690 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Stress testing of economic policies, regulations, financial risk evaluations, and statistical inference have lately become a “requirement.” This chapter highlights extant econometric tools for stress testing with an emphasis on: (a) maximum entropy bootstraps, recently implemented in a new version of the R software package called “meboot,” and (b) creation of stress scenarios by considering time heterogeneous nonstationary time series. We use published simulation designs of other authors to report the superiority of meboot over the moving block bootstrap (mbb) and the blocking external bootstrap (BEB) in the context of many types of time-heterogeneity. For illustration, we apply meboot tools to stress test inference regarding Granger-causality between asset prices and world savings rates, and also to the “Value at Risk” used in finance. We indicate potential uses in stress testing of banks.

Keywords: Applied Investments; Financial Forecasting; Portfolio Theory; Investment Strategies; Fundamental and Economic Anomalies; Behaviour of Investors (search for similar items in EconPapers)
JEL-codes: G1 G11 G17 (search for similar items in EconPapers)
Date: 2020
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