## 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

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2018/03/09/macroprudential-stress-tests-a-reduced-form-approach-to-quantifying-systemic-risk-losses-45691_