MuSE: a multiple macro-financial scenario simulation engine for stress testing

Marcel Bräutigam, Juan Manuel Figueres, Carla Giglio, Alberto Grassi, Barbara Montero Prieto, Rodriguez d’Acri, Costanza and Carmelo Salleo

No 3270, Working Paper Series from European Central Bank

Abstract: We design an econometric framework to simulate multiple adverse macro-financial scenarios that can be used in top-down stress tests. First, we create a financial stress index informed by shocks generated via a non-parametric copula estimated on a large dataset of daily financial indicators. Second, we simulate the joint dynamics of macroeconomic indicators conditional on the copula-based financial shocks in a large multi-country Bayesian VAR model. This framework,which we refer to as the Multiple macro-financial stress scenario Simulation Engine, MuSE, allows us to replicate thousands of macro-financial stress scenarios where adverse shocks generated in the financial sector propagate into the overall economy, triggering significant macroeconomic fluctuations. We demonstrate its functionality by generating a large number of scenarios inspired from past crises capturing stress stemming from financial markets, sovereign debt, and geopolitical tensions. Using a top-down solvency stress test model, based on recent EU-wide stress tests, we project the capital depletion for euro area banks and find that adverse scenarios triggered by stock market and sovereign shocks appear to threaten the resilience of the euro area banking sector the most at this juncture. JEL Classification: C15, G01, G17, G21

Keywords: Bayesian techniques; financial copulas; financial institutions; macrofinancial scenario calibration; stress testing (search for similar items in EconPapers)
Date: 2026-08
New Economics Papers: this item is included in nep-eec and nep-fdg
Note: 1654951
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