Abstract

http://ssrn.com/abstract=2156095
 
 

Citations (2)



 


 



A New Heuristic Measure of Fragility and Tail Risks: Application to Stress Testing


Nassim Nicholas Taleb


NYU-Tandon School of Engineering; New England Complex Systems Institute

Elie R.D. Canetti


International Monetary Fund (IMF)

Tidiane Kinda


International Monetary Fund (IMF)

Elena Loukoianova


International Monetary Fund (IMF)

Christian Schmieder


International Monetary Fund (IMF)

August 2012

IMF Working Paper No. 12/216

Abstract:     
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.

Number of Pages in PDF File: 25

Keywords: Stress Testing, Forecasting, Stability, Banks, Economic Models, Public Debt


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Date posted: October 3, 2012  

Suggested Citation

Taleb, Nassim Nicholas and Canetti, Elie R.D. and Kinda, Tidiane and Loukoianova, Elena and Schmieder, Christian, A New Heuristic Measure of Fragility and Tail Risks: Application to Stress Testing (August 2012). IMF Working Paper No. 12/216. Available at SSRN: http://ssrn.com/abstract=2156095

Contact Information

Nassim Nicholas Taleb (Contact Author)
NYU-Tandon School of Engineering ( email )
Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States
New England Complex Systems Institute ( email )
24 Mt. Auburn St.
Cambridge, MA 02138
United States
Elie R.D. Canetti
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
Tidiane Kinda
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
Elena Loukoianova
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
Christian Schmieder
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
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