A New Heuristic Measure of Fragility and Tail Risks : Application to Stress Testing

Author/Editor: Christian Schmieder ; Tidiane Kinda ; Nassim N. Taleb ; Elena Loukoianova ; Elie Canetti
Publication Date: August 01, 2012
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Summary: This paper presents a simple heuristic measure of tail risk, which is applied to individual bank stress tests and to public debt. Stress testing can be seen as a first order test of the level of potential negative outcomes in response to tail shocks. However, the results of stress testing can be misleading in the presence of model error and the uncertainty attending parameters and their estimation. The heuristic can be seen as a second order stress test to detect nonlinearities in the tails that can lead to fragility, i.e., provide additional information on the robustness of stress tests. It also shows how the measure can be used to assess the robustness of public debt forecasts, an important issue in many countries. The heuristic measure outlined here can be used in a variety of situations to ascertain an ordinal ranking of fragility to tail risks.
Series: Working Paper No. 12/216
Subject(s): Banks | Economic models | Public debt | Stress testing

Author's Keyword(s): Stress Testing | Forecasting | Stability
Publication Date: August 01, 2012
ISBN/ISSN: 9781475505665/1018-5941 Format: Paper
Stock No: WPIEA2012216 Pages: 24
US$18.00 (Academic Rate:
US$18.00 )
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