Stress-Testing Financial Systems: An Overview of Current Methodologies

41 Pages Posted: 20 Sep 2007

See all articles by Marco Sorge

Marco Sorge

World Bank Group - International Finance Corporation

Date Written: December 2004

Abstract

This paper reviews the state-of-the-art of macro stress-testing methodologies. Substantial progress has been made both in the econometric analysis of financial soundness indicators and in the simulation of value-at-risk measures to assess system-wide vulnerabilities. However, a number of methodological challenges still remain concerning the correlation of market and credit risks over time and across institutions, the limited time horizon generally used for the analysis and the potential instability of reduced-form parameter estimates because of feedback effects. Further research in this area might also focus on how to use macro stress-testing techniques as an operational tool to incorporate financial stability considerations into monetary policy decision-making.

Keywords: Macro stress-testing, financial soundness indicators, value at risk, feedback effects

JEL Classification: G21, G10, E37

Suggested Citation

Sorge, Marco, Stress-Testing Financial Systems: An Overview of Current Methodologies (December 2004). BIS Working Paper No. 165. Available at SSRN: https://ssrn.com/abstract=759585 or http://dx.doi.org/10.2139/ssrn.759585

Marco Sorge (Contact Author)

World Bank Group - International Finance Corporation ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

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