Stress Testing (2nd Edition)
First published:
ISBN: 978-1-78272-391-2
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Econometric Pitfalls in Stress Testing
Foreword
Introduction
Response to Financial Crises: The Development of Stress Testing over Time
Stress Testing and Other Risk Management Tools
Econometric Pitfalls in Stress Testing
Stress-testing applications of Machine Learning Models
Four Years of Concurrent Stress Testing at the Bank of England: Developing the Macroprudential Perspective
Stress Testing for Market Risk
The Evolution of Stress Testing Counterparty Exposures
Liquidity Risk: The Case of the Brazilian Banking System
Operational Risk: An Overview of Stress-testing Methodologies
Peacetime Stress Testing: A Proposal
Stress-test Modelling for Loan Losses and Reserves
A New Framework for Stress Testing Banks’ Corporate Credit Portfolio
EU-wide Stress Test: The Experience of the EBA
Stress Testing Across International Exposures and Activities
The Asset Market Effects of Bank Stress-test Disclosures
An Alternative Approach to Stress Testing a Bank’s Trading Book
Determining the Severity of Macroeconomic Stress Scenarios
Governance over Stress Testing
The use of econometric methods for stress testing has created significant challenges for econometricians. These challenges include issues such as multicollinearity, specification errors, identification issues and regime dependence, that get altered by stress testing. Additionally, the short data span and different objectives pose new problems. However, they have also inspired econometricians to develop innovative methodologies. This chapter reviews several elements of these challenges as well as ways that have been proposed to overcome them.
WHY STRESS TESTS POSE CHALLENGES FOR ECONOMETRICIANS
There are several reasons why stress tests pose challenges for traditional econometric methods. First, many of the problems that occur in traditional econometric applications recur in stress testing applications, often with a twist. These are multicollinearity, specification errors such as omitted variables bias, identification issues and regime dependence. Additional complications commonly arise from the application of the econometric models to stress-test applications where the independent variables are stressed.
The second set of issues arises from the characteristics of the data
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