How to Improve the Quality of Stress Tests through Backtesting
Year: 2012 Volume: 62 Issue: 4 Pages: 325-346
Abstract: This paper describes the stress-testing framework used in the Czech central bank and focuses on the general question of how to calibrate the models and parameters used to stress test the most important risks in the banking system. The paper argues that stress tests should be calibrated conservatively to overestimate the risks so that sufficient buffers are in place for when adverse shocks materialize. However, to ensure that the stress test framework is conservative enough over time, backtesting, i.e., comparison of the actual values of key financial variables with the predictions generated by the stress-testing models, should be a standard part of the stress-testing framework.
JEL classification: E44, E47, G21
Keywords: stress testing, credit risk, bank capital
RePEc: http://ideas.repec.org/a/fau/fauart/v62y2012i4p325-346.html
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