Macroprudential Stress Tests: A Reduced-Form Approach to Quantifying Systemic Risk Losses
IMF Working Papers, March 9, 2018
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Bibliographic details
- Authors: Zineddine Alla, Raphael A Espinoza, Qiaoluan H. Li, Miguel A. Segoviano
- Published: March 9, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484345344.001
Overview and objectives
- Authors: Zineddine Alla, Raphael A Espinoza, Qiaoluan H. Li, Miguel A. Segoviano
- Date: March 9, 2018
- Objective: Present a novel approach that incorporates individual entity stress testing and losses from systemic risk effects (SE losses) into macroprudential stress testing.
Methodology and core mechanics
- SE losses are measured using a reduced-form model that values financial entity assets conditional on:
- macroeconomic stress, and
- the distress of other entities in the system.
- Valuation is enabled by a multivariate density characterizing the asset values of financial entities in the system.
- The multivariate density in this paper is estimated using CIMDO, a statistical approach which:
- infers densities consistent with entities’ probabilities of default, and
- uses market-based data to estimate those probabilities of default.
- SE losses capture effects of interconnectedness structures that are consistent with markets’ perceptions of risk.
Decomposition and attribution of systemic losses
- SE losses are decomposed into:
- the likelihood of distress, and
- the magnitude of losses.
- This decomposition quantifies the contribution of specific entities to systemic contagion.
Illustration and application
- The approach is illustrated by quantifying SE losses due to Lehman Brothers’ default.
Subjects and thematic focus
- Asset and liability management
- Asset valuation
- Banking
- Countercyclical capital buffers
- Financial contagion
- Financial regulation and supervision
- Financial sector policy and analysis
- Stress testing
- Systemic risk
Keywords and technical terms preserved from the source
- amplification loss
- Asset valuation
- asset valuation model
- CIMDO method
- conditional loss
- Countercyclical capital buffers
- estimating Se loss
- Financial contagion
- financial stability
- financial system
- Global
- interconnectedness structure
- LB default
- loss propagation
- losses from Se
- market price
- presents loss
- Se loss
- SRA loss
- stress test loss
- Stress testing
- systemic risk
- WP
IMF Working Paper — Macroprudential Stress Tests: A Reduced-Form Approach to Quantifying Systemic Risk Losses (authors: Zineddine Alla, Raphael A Espinoza, Qiaoluan H. Li, Miguel A. Segoviano), March 9, 2018.