{
  "title": "Macroprudential Stress Tests: A Reduced-Form Approach to Quantifying Systemic Risk Losses",
  "publication": "IMF Working Papers, March 9, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/03/09/macroprudential-stress-tests-a-reduced-form-approach-to-quantifying-systemic-risk-losses-45691",
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  "summary": "We present a novel approach that incorporates individual entity stress testing and losses from systemic risk effects (SE losses) into macroprudential stress testing.",
  "sections": [
    {
      "heading": "Overview and objectives",
      "content": "- Authors: Zineddine Alla, Raphael A Espinoza, Qiaoluan H. Li, Miguel A. Segoviano\n- Date: March 9, 2018\n- Objective: Present a novel approach that incorporates individual entity stress testing and losses from systemic risk effects (SE losses) into macroprudential stress testing."
    },
    {
      "heading": "Methodology and core mechanics",
      "content": "- SE losses are measured using a reduced-form model that values financial entity assets conditional on:\n  - macroeconomic stress, and\n  - the distress of other entities in the system.\n- Valuation is enabled by a multivariate density characterizing the asset values of financial entities in the system.\n- The multivariate density in this paper is estimated using CIMDO, a statistical approach which:\n  - infers densities consistent with entities’ probabilities of default, and\n  - uses market-based data to estimate those probabilities of default.\n- SE losses capture effects of interconnectedness structures that are consistent with markets’ perceptions of risk."
    },
    {
      "heading": "Decomposition and attribution of systemic losses",
      "content": "- SE losses are decomposed into:\n  - the likelihood of distress, and\n  - the magnitude of losses.\n- This decomposition quantifies the contribution of specific entities to systemic contagion."
    },
    {
      "heading": "Illustration and application",
      "content": "- The approach is illustrated by quantifying SE losses due to Lehman Brothers’ default."
    },
    {
      "heading": "Subjects and thematic focus",
      "content": "- Asset and liability management\n- Asset valuation\n- Banking\n- Countercyclical capital buffers\n- Financial contagion\n- Financial regulation and supervision\n- Financial sector policy and analysis\n- Stress testing\n- Systemic risk"
    },
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      "heading": "Keywords and technical terms preserved from the source",
      "content": "- amplification loss\n- Asset valuation\n- asset valuation model\n- CIMDO method\n- conditional loss\n- Countercyclical capital buffers\n- estimating Se loss\n- Financial contagion\n- financial stability\n- financial system\n- Global\n- interconnectedness structure\n- LB default\n- loss propagation\n- losses from Se\n- market price\n- presents loss\n- Se loss\n- SRA loss\n- stress test loss\n- Stress testing\n- systemic risk\n- WP\n\nIMF 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.\n\n---\n\n Content in this bundle\n\n- wp1849\n  - wp1849 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp1849 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/03/09/macroprudential-stress-tests-a-reduced-form-approach-to-quantifying-systemic-risk-losses-45691"
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    "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",
    "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.",
    "SE losses are measured using a reduced-form model that values financial entity assets conditional on:",
    "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:",
    "SE losses capture effects of interconnectedness structures that are consistent with markets’ perceptions of risk.",
    "SE losses are decomposed into:",
    "This decomposition quantifies the contribution of specific entities to systemic contagion.",
    "The approach is illustrated by quantifying SE losses due to Lehman Brothers’ default.",
    "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",
    "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",
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