A macroeconomic reverse stress test

Grundke, Peter; Pliszka, Kamil

doi:10.1007/s11156-017-0655-8

Cited by 11 publications

(19 citation statements)

References 41 publications

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“…One further comparison is possible. We noted that some other authors have used very few Monte Carlo trials in their analyses ( [25,29], for example). Although their contexts were very different from ours, we can find what happens if we use a low number of Monte Carlo trials.…”

Section: Previous Resultsmentioning

confidence: 99%

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Operational Risk Reverse Stress Testing: Optimal Solutions

Mitic

2021

MCA

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Selecting a suitable method to solve a black-box optimization problem that uses noisy data was considered. A targeted stop condition for the function to be optimized, implemented as a stochastic algorithm, makes established Bayesian methods inadmissible. A simple modification was proposed and shown to improve optimization the efficiency considerably. The optimization effectiveness was measured in terms of the mean and standard deviation of the number of function evaluations required to achieve the target. Comparisons with alternative methods showed that the modified Bayesian method and binary search were both performant, but in different ways. In a sequence of identical runs, the former had a lower expected value for the number of runs needed to find an optimal value. The latter had a lower standard deviation for the same sequence of runs. Additionally, we suggested a way to find an approximate solution to the same problem using symbolic computation. Faster results could be obtained at the expense of some impaired accuracy and increased memory requirements.

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Section: Previous Resultsmentioning

confidence: 99%

“…The study by Grundke [29] was similar to that of Albanese et al in that pre-determined scenarios were evaluated, and VaR was determined from them. The context was credit and interest rate risk measured through cash flows of assets and liabilities.…”

Section: Recent Advances In Reverse Stress Testingmentioning

confidence: 99%

Operational Risk Reverse Stress Testing: Optimal Solutions

Mitic

2021

MCA

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“…(Response n. 23, p. 8). 45 It follows the same logic adopted in other works; in this regard, see Breuer et al (2009), Flood andKorenko (2015), Grundke and Pliszka (2018). 46 An alternative technique could be rank normalization, through which each risk factor value is replaced by its rank in that sample.…”

Section: Reverse Stress Test Scenario Selection: the Criterion Of Proximitymentioning

confidence: 95%

“…Glasserman et al (2015). 6 Along that research avenue are the works of: Grundke and Pliszka (2018), McNeil and Smith (2012).…”

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confidence: 99%

Stochastic Optimization System for Bank Reverse Stress Testing

Montesi

Papiro

Fazzini³

et al. 2020

JRFM

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The recent evolution of prudential regulation establishes a new requirement for banks and supervisors to perform reverse stress test exercises in their risk assessment processes, aimed at detecting default or near-default scenarios. We propose a reverse stress test methodology based on a stochastic simulation optimization system. This methodology enables users to derive the critical combination of risk factors that, by triggering a preset key capital indicator threshold, causes the bank’s default, thus detecting the set of assumptions that defines the reverse stress test scenario. This article presents a theoretical presentation of the approach, providing a general description of the stochastic framework and, for illustrative purposes, an example of the application of the proposed methodology to the Italian banking sector, in order to illustrate the possible advantages of the approach in a simplified framework, which highlights the basic functioning of the model. In the paper, we also show how to take into account some relevant risk factor interactions and second round effects such as liquidity–solvency interlinkage and modeling of Pillar 2 risks including interest rate risk, sovereign risk, and reputational risk. The reverse stress test technique presented is a practical and manageable risk assessment approach, suitable for both micro- and macro-prudential analysis.

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“…In a related context, Grundke & Pliszka (2018) show that heavy-tailed copulas (Clayton and t-copula) are more appropriate for fitting a stress test model to historical observations. the initial default probabilities can increase by +20% to +80% -depending on the selected stress test model.…”

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confidence: 99%

System-Wide and Banks' Internal Stress Tests: Regulatory Requirements and Literature Review

Pliszka

2021

SSRN Journal

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Research questionThe financial crisis of 2007-09 revealed the vulnerability of banks. In response, stress testing was established as a key supervisory element and as an essential risk management tool. Based on these developments, this paper first deals with system-wide stress tests and provides an overview of their evolution, compares programs in major jurisdictions, and reviews the academic literature. Second, this paper summarizes regulatory requirements and expectations for banks' internal stress tests and gives an overview of the relevant literature. ContributionThis paper contributes to the literature, as it deals with both system-wide stress tests and banks' internal stress tests and discusses the differences between the two types. Moreover, it provides an update of earlier surveys by covering discussions from 2019-20 on the envisaged changes to system-wide stress testing in the EU and the US. ResultsSystem-wide stress tests have gained in importance. For instance, they feed into the calculation of capital requirements in the EU. The literature shows that the disclosure of stress test results reveals new information to the market. Furthermore, banks that participate in system-wide stress tests increase their capital ratios and shift lending to less risky borrowers. Banks' internal stress tests are deeply embedded in the Basel III framework and the banks that apply internal models are subject to more stringent stress testing requirements. For example, these banks have to ensure capital adequacy if the internal risk parameters are being stressed. Research on banks' internal stress tests shows that stress scenarios derived from expert judgment should be complemented by scenarios, which consider historical characteristics of the risk factors. As stress testing is exposed to considerable model and estimation risk, banks should carry out extensive robustness checks. In sum, both system-wide and banks' internal stress tests play a complementary role in ensuring resilience of individual banks and the financial system to adverse shocks. Nichttechnische ZusammenfassungFragestellung Als Reaktion auf die Finanzmarktkrise 2007 bis 2009 wurden Stresstests als ein zentrales Element der Aufsicht und als ein wichtiges Instrument im Risikomanagement etabliert. Ausgehend von diesen Entwicklungen befasst sich dieses Papier zunächst mit systemweiten Stresstests und gibt hierbei eine Übersicht über die Entwicklung, vergleicht Programme aus verschiedenen Jurisdiktionen und rezensiert die wissenschaftliche Literatur. Zum anderen fasst das Papier regulatorische Erwartungen zu bankinternen Stresstests zusammen und gibt einen Überblick über die einschlägige Literatur. Beitrag Der Beitrag des Papiers liegt darin, dass es sich sowohl mit systemweiten als auch mit bankinternen Stresstests beschäftigt und dabei die Unterschiede diskutiert. Darüber hinaus geht es auf Diskussionen aus 2019 und 2020 zu angedachten Änderungen bei systemweiten Stresstests in der EU und in den USA ein. Ergebnisse Systemweite Stresstests haben an Bedeutung gewo...

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A macroeconomic reverse stress test

Cited by 11 publications

References 41 publications

Operational Risk Reverse Stress Testing: Optimal Solutions

Operational Risk Reverse Stress Testing: Optimal Solutions

Stochastic Optimization System for Bank Reverse Stress Testing

System-Wide and Banks' Internal Stress Tests: Regulatory Requirements and Literature Review

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