Stress-testing financial systems: an overview of current methodologies

Marco Sorge
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Marco Sorge: World Bank Group - International Finance Corporation

No 165, BIS Working Papers from Bank for International Settlements

Abstract: This paper reviews the state-of-the-art of macro stress-testing methodologies. Substantial progress has been made both in the econometric analysis of financial soundness indicators and in the simulation of value-at-risk measures to assess system-wide vulnerabilities. However, a number of methodological challenges still remain concerning the correlation of market and credit risks over time and across institutions, the limited time horizon generally used for the analysis and the potential instability of reduced-form parameter estimates because of feedback effects. Further research in this area might also focus on how to use macro stress-testing techniques as an operational tool to incorporate financial stability considerations into monetary policy decision-making.

Keywords: Macro stress-testing; financial soundness indicators; value at risk; feedback effects (search for similar items in EconPapers)
JEL-codes: E37 G10 G21 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2004-12
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Citations: View citations in EconPapers (107)

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