Systemic Real and Financial Risks: Measurement, Forecasting, and Stress Testing
February 1, 2012
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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.
Subject: Bank credit, Financial institutions, Financial sector policy and analysis, Loans, Money, Stress testing, Systemic risk, Systemic risk assessment
Keywords: Bank credit, bank credit demand shocks, bank credit growth, Density Forecasts, Dynamic Factor Model, estimation procedure, forecasting power, Global, loan rate, Loans, quantile auto-regression, Quantile Auto-regressions, quantile curve, quantile estimate, quantile projection, risk indicator, Stress testing, Systemic risk, Systemic risk assessment, Systemic Risks, time series, WP
Pages:
41
Volume:
2012
DOI:
Issue:
058
Series:
Working Paper No. 2012/058
Stock No:
WPIEA2012058
ISBN:
9781463937768
ISSN:
1018-5941
