IMF Working Papers

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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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. 12/58

Subject:

Economic indicators Financial risk Forecasting models Group of seven Prices Time series