Measuring Financial Stability: Applying the MfRisk Model to the Netherlands
Jan Willem End () and
DNB Working Papers from Netherlands Central Bank, Research Department
Models which integrate various financial stability risks are still in an early stage of development. In this paper we use the Macrofinancial Risk model (MfRisk) to construct a measure for financial stability. MfRisk applies the Merton option model in a multi-sector framework. We argue that this method satisfies the macro-prudential approach. On the basis of the MfRisk model we construct a system-wide financial stability measure for the Netherlands, which builds on the put options of the banking, insurance and pension sectors. This measure approximates the probability and the potential loss of stress in the financia l system. The measure is tested against various indicators of default risk, from which we conclude that it is a reliable proxy. Finally, it is shown how the measure can be used for stress testing.
Keywords: financial stability; default risk; option model (search for similar items in EconPapers)
JEL-codes: G12 G13 G28 G32 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fin and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:030
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