Macro-Prudential Stress Test Models: A Survey
IMF Working Papers, August 25, 2023
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Bibliographic details
- Authors: David Aikman, Daniel Beale, Adam Brinley-Codd, Anne-Caroline Hüser, Giovanni Covi, Caterina Lepore
- Published: August 25, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400249921.001
Overview
- This paper surveys the rapidly developing literature on macroprudential stress-testing models.
- The paper's aims are two-fold:
- to provide a reference guide of the state-of-the-art for those developing such models;
- to distil insights from this endeavour for policy-makers using these models.
Scope
- Includes models of:
- contagion between banks;
- contagion within the wider financial system including non-bank financial institutions such as investment funds;
- models that emphasise the two-way interaction between the financial sector and the real economy.
Modelling frontier: main challenges identified
- (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress;
- (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress;
- (c) stress testing models that incorporate comprehensive two-way interactions between the financial system and the real economy.
Emerging lessons for policy-makers
- For a given-sized shock hitting the system, its eventual impact will depend on:
- (a) the size of financial institutions' capital and liquidity buffers;
- (b) the liquidation strategies financial institutions adopt when they need to raise cash;
- (c) the topology of the financial network.
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