57 Pages Posted: 19 Feb 2011 Last revised: 3 Oct 2017
Date Written: March 15, 2011
Building on De Nicolò and Lucchetta (2010), this paper presents 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) reduced-form stress tests as historical simulations; and (c) structural stress-tests as impulse responses of systemic risk indicators to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets 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 in each country. Furthermore, reduced-form stress tests, as well as structural stress tests in which aggregate demand shocks and bank credit demand shocks are identified as the main drivers of cycles in real activity and bank lending, provide significant early warnings on the build-up of real and financial vulnerabilities.
Keywords: Systemic Risks, Dynamic Factor Model, Quantile Auto-regressions, Density Forecasts
JEL Classification: C5, E3, G2
Suggested Citation: Suggested Citation
De Nicolo, Gianni and Lucchetta, Marcella, Systemic Real and Financial Risks: Measurement, Forecasting, and Stress Testing (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1763852 or http://dx.doi.org/10.2139/ssrn.1763852