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Stress Testing: A Review of Key Concepts

Author

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  • Martin Cihak

Abstract

The note is a review of the literature on the quantitative methods used to assess the vulnerabilities of financial systems to risks. In particular, the author focuses on the role of system-wide stress testing. He summarizes the recent developments in the literature, highlighting topics relevant for the Czech case. He presents the key concepts relating to systemwide stress tests, overviews the stress tests performed by central banks and international financial institutions, and discusses conceptual issues relating to modeling of individual risk factors.

Suggested Citation

  • Martin Cihak, 2004. "Stress Testing: A Review of Key Concepts," Research and Policy Notes 2004/02, Czech National Bank.
    • Handle: RePEc:cnb:rpnrpn:2004/02
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/irpn/download/irpn_2_2004.pdf
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    References listed on IDEAS

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    1. Robert R. Bliss, 1997. "Movements in the term structure of interest rates," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 4), pages 16-33.
    2. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
    3. Jan Hanousek & Jiri Podpiera, 2001. "Detection of Bank Failures in Transition Economies: The Case of the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 51(5), pages 264-278, May.
    4. Herring, Richard J, 1999. "Credit Risk and Financial Instability," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(3), pages 63-79, Autumn.
    5. Panagiotis Papapanagiotou & Mr. Theodore M. Barnhill & Miss Liliana B Schumacher, 2000. "Measuring Integrated Market and Credit Risks in Bank Portfolios: An Application to a Set of Hypothetical Banks Operation in South Africa," IMF Working Papers 2000/212, International Monetary Fund.
    6. Jeremy Berkowitz, 1999. "A coherent framework for stress-testing," Finance and Economics Discussion Series 1999-29, Board of Governors of the Federal Reserve System (U.S.).
    7. repec:onb:oenbwp:y:2002:i:3:b:3 is not listed on IDEAS
    8. Harvir Kalirai & Martin Scheicher, 2002. "Macroeconomic Stress Testing: Preliminary Evidence for Austria," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 58-74.
    9. Furfine, Craig H, 2003. "Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
    10. Michael S. Gibson, 1997. "Information systems for risk management," International Finance Discussion Papers 585, Board of Governors of the Federal Reserve System (U.S.).
    11. Bank for International Settlements, 2000. "Stress Testing by Large Financial Institutions: Current Practice and Aggregation Issues," CGFS Papers, Bank for International Settlements, number 14, december.
    12. Lopez, Jose A. & Saidenberg, Marc R., 2000. "Evaluating credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 151-165, January.
    13. Longin, François, 1999. "From Value at Risk to Stress Testing: The Extreme Value Approach," CEPR Discussion Papers 2161, C.E.P.R. Discussion Papers.
    14. Umberto Cherubini & Giovanni Lunga, 1999. "Stress testing techniques and value-at-risk measures: A unified approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 22(1), pages 77-99, March.
    15. Bank for International Settlements, 2001. "Marrying the macro- and micro-prudential dimensions of financial stability," BIS Papers, Bank for International Settlements, number 01.
    16. Thomas C. Wilson, 1998. "Portfolio credit risk," Economic Policy Review, Federal Reserve Bank of New York, vol. 4(Oct), pages 71-82.
    17. Ingo Fender & Michael S. Gibson & Patricia C. Mosser, 2001. "An international survey of stress tests," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 7(Nov).
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    Citations

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    Cited by:

    1. Darne, O. & Levy-Rueff, O. & Pop, A., 2013. "Calibrating Initial Shocks in Bank Stress Test Scenarios: An Outlier Detection Based Approach," Working papers 426, Banque de France.
    2. Aikman, David & Angotti, Romain & Budnik, Katarzyna, 2024. "Stress testing with multiple scenarios: a tale on tails and reverse stress scenarios," Working Paper Series 2941, European Central Bank.
    3. repec:onb:oenbwp:y::i:150:b:1 is not listed on IDEAS
    4. Biswa N. Bhattacharyay, 2009. "Towards a Macroprudential Surveillance and Remedial Policy Formulation System for Monitoring Financial Crisis," CESifo Working Paper Series 2803, CESifo.
    5. Mizuho Kida, 2008. "A macro stress testing model with feedback effects," Reserve Bank of New Zealand Discussion Paper Series DP2008/08, Reserve Bank of New Zealand.
    6. Pami Dua & Hema Kapur, 2017. "Macro Stress Testing of Indian Bank Groups," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 11(4), pages 375-403, November.
    7. Biswa N. Bhattacharyay & Dennis Dlugosch & Benedikt Kolb & Kajal Lahiri & Irshat Mukhametov & Gernot Nerb, 2009. "Early Warning System for Economic and Financial Risks in Kazakhstan," CESifo Working Paper Series 2832, CESifo.
    8. Darné, Olivier & Levy-Rueff, Guy & Pop, Adrian, 2024. "The calibration of initial shocks in bank stress test scenarios: An outlier detection based approach," Economic Modelling, Elsevier, vol. 136(C).

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    More about this item

    Keywords

    Financial soundness; macroprudential analysis; stress tests.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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