Integrating Solvency and Liquidity Stress Tests: The Use of Markov Regime-Switching Models
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Summary:
The paper presents a framework to integrate liquidity and solvency stress tests. An empirical study based on European bond trading data finds that asset sales haircuts depend on the total amount of assets sold and general liquidity conditions in the market. To account for variations in market liquidity, the study uses Markov regime-switching models and links haircuts with market volatility and the amount of securities sold by banks. The framework is accompanied by a Matlab program and an Excel-based tool, which allow the calculations to be replicated for any type of traded security and to be used for liquidity and solvency stress testing.
Series:
Working Paper No. 2019/250
Subject:
Asset and liability management Asset liquidity Asset management Banking Financial institutions Financial regulation and supervision Liquidity Liquidity risk Sovereign bonds
English
Publication Date:
November 15, 2019
ISBN/ISSN:
9781513519791/1018-5941
Stock No:
WPIEA2019250
Pages:
41
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