2 Works

Non-Linearities, Model Uncertainty, and Macro Stress Testing

Miroslav Misina & David Tessier
A distinguishing feature of macro stress testing exercises is the use of macroeconomic models in scenario design and implementation. It is widely agreed that scenarios should be based on "rare but plausible" events that have either resulted in vulnerabilities in the past or could do so in the future. This requirement, however, raises a number of difficult statistical and methodological problems. Economic models, as well as the statistical models of the relationships among economic variables,...

Quantifying Contagion Risk in Funding Markets: A Model-Based Stress-Testing Approach

Kartik Anand, Céline Gauthier & Moez Souissi
We propose a tractable, model-based stress-testing framework where the solvency risks, funding liquidity risks and market risks of banks are intertwined. We highlight how coordination failure between a bank’s creditors and adverse selection in the secondary market for the bank’s assets interact, leading to a vicious cycle that can drive otherwise solvent banks to illiquidity. Investors’ pessimism over the quality of a bank’s assets reduces the bank’s recourse to liquidity, which exacerbates the incidence of...

Registration Year

  • 2021

Resource Types

  • Text


  • Université du Québec en Outaouais
  • Bank of England
  • Bank of Canada
  • International Monetary Fund