Systemic Real and Financial Risks: Measurement, Forecasting, and Stress Testing

Author/Editor:

Marcella Lucchetta ; Gianni De Nicolo

Publication Date:

February 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper formulates a novel modeling framework that delivers: (a) forecasts of indicators of systemic real risk and systemic financial risk based on density forecasts of indicators of real activity and financial health; (b) stress-tests as measures of the dynamics of responses of systemic risk indicators to structural shocks identified by standard macroeconomic and banking theory. Using a large number of quarterly time series of the G-7 economies in 1980Q1-2010Q2, we show that the model exhibits significant out-of sample forecasting power for tail real and financial risk realizations, and that stress testing provides useful early warnings on the build-up of real and financial vulnerabilities.

Series:

Working Paper No. 2012/058

Subject:

Bank credit Financial institutions Financial sector policy and analysis Loans Money Stress testing Systemic risk Systemic risk assessment

English

Publication Date:

February 1, 2012

ISBN/ISSN:

9781463937768/1018-5941

Stock No:

WPIEA2012058

Pages:

41

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