New Heuristic Measure of Fragility and Tail Risks : Application to Stress Testing.
Title:
New Heuristic Measure of Fragility and Tail Risks : Application to Stress Testing.
Author:
Schmieder, Christian.
ISBN:
9781475514971
Personal Author:
Physical Description:
1 online resource (25 pages)
Series:
IMF Working Papers
Contents:
Cover -- Contents -- I. Introduction -- II. Review of Concepts to Assess Fragility -- A. The Current State of Stress Testing -- B. A Simple Heuristic to Detect Fragility -- C. How Can the Simple Heuristic Enhance Stress Tests? -- III. The Heuristic Applied to the Outcome of Stress Tests -- A. Purpose for the Use of the Heuristic -- B. Case Study I: The Simple Heuristic Applied to Bank Stress Tests -- C. Case Study II: The Simple Heuristic Applied to Public Debt -- IV. How to Apply the Simple Heuristic in IMF Stress Tests -- V. Conclusion -- References -- Tables -- 1. The Heuristic Applied to the Outcome of Macroeconomic Stress Tests for the Largest U.S. Banks -- 2. Overall Fragility of Banks -- 3. Change in Net Debt Under Various Scenarios -- Figures -- 1. Why the Concave is Hurt by Tail Events -- 2. Illustration of the Use of the Heuristic -- 3. Fragile and Antifragile Outcomes of Stress Tests -- 4. Illustration of Debt Dynamics Under Various Scenarios -- 5. The Simple Heuristic as an Integral Part of Stress Test Frameworks -- Appendices -- I. Details on Macroeconomic Bank Stress Test -- II. Details on Public Debt Stress Test.
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.
Local Note:
Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2017. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.
Genre:
Electronic Access:
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