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Author/Editor:
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Christian Schmieder ; Tidiane Kinda ; Nassim N. Taleb ; Elena Loukoianova ; Elie Canetti
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Publication Date:
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August 01, 2012
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Electronic Access:
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Free Full text
(PDF file size is 1,095KB).
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
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Summary:
This paper presents a simple heuristic measure of tail risk, which is applied to individual bank stress tests and to public debt. Stress testing can be seen as a first order test of the level of potential negative outcomes in response to tail shocks. However, the results of stress testing can be misleading in the presence of model error and the uncertainty attending parameters and their estimation. The heuristic can be seen as a second order stress test to detect nonlinearities in the tails that can lead to fragility, i.e., provide additional information on the robustness of stress tests. It also shows how the measure can be used to assess the robustness of public debt forecasts, an important issue in many countries. The heuristic measure outlined here can be used in a variety of situations to ascertain an ordinal ranking of fragility to tail risks.
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Order a print copy
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Series:
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Working Paper No. 12/216
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Subject(s):
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Banks | Economic models | Public debt | Stress testing
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Author's Keyword(s):
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Stress Testing | Forecasting | Stability |
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