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Macro-Prudential Stress Test Models: A Survey
Author:
David Aikman
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,
Daniel Beale
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Adam Brinley-Codd
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Anne-Caroline Hüser
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Giovanni Covi https://isni.org/isni/0000000404811396 International Monetary Fund

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Caterina Lepore
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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 173
Language:
English
Publication Date:
25 Aug 2023
DOI:
https://doi.org/10.5089/9798400249921.001
ISBN:
9798400249921
ISSN:
1018-5941
Pages:
50
Keywords:
Stress testing; system-wide models; contagion; systemic risk; market-based finance; real-financial linkages; macro-prudential policy.; bank resilience channel; modelling frontier; bank financial system; models of contagion; variation margin; Asset liquidity; Commercial banks; Liquidity; Solvency; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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In this paper, we survey the rapidly developing literature on macroprudential stress-testing models. The scope of the survey includes models of contagion between banks, models of contagion within the wider financial system including non-bank financial institutions such as investment funds, and models that emphasise the two-way interaction between the financial sector and the real economy. Our aim is two-fold: first, to provide a reference guide of the state-of-the-art for those developing such models; second, to distil insights from this endeavour for policy-makers using these models. In our view, the modelling frontier faces three main challenges: (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress, (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress and (c) stress testing models that incorporate comprehensive two-way interactions between the financial system and the real economy. Emerging lessons for policy-makers are that, for a given-sized shock hitting the system, its eventual impact will depend on (a) the size of financial institutions' capital and liquidity buffers, (b) the liquidation strategies financial institutions adopt when they need to raise cash, and (c) the topology of the financial network.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund