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How to Improve the Quality of Stress Tests through Backtesting

Author

Listed:
  • Adam Gersl

    (Joint Vienna Institute; Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague)

  • Jakub Seidler

    (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague)

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.

Suggested Citation

  • Adam Gersl & Jakub Seidler, 2012. "How to Improve the Quality of Stress Tests through Backtesting," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(4), pages 325-346, August.
    • Handle: RePEc:fau:fauart:v:62:y:2012:i:4:p:325-346
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    File URL: http://journal.fsv.cuni.cz/storage/1252_325-346---gersl.pdf
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    References listed on IDEAS

    as
    1. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410, Central Bank of Chile.
    2. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, vol. 12(C), pages 3-15.
    3. Thomas Breuer & Martin Jandacka & Klaus Rheinberger & Martin Summer, 2009. "How to Find Plausible, Severe and Useful Stress Scenarios," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 205-224, September.
    4. Petr Jakubík & Jaroslav Heřmánek, 2008. "Stress testing of the czech banking sector," Prague Economic Papers, Prague University of Economics and Business, vol. 2008(3), pages 195-212.
    5. Petr Jakubik & Christian Schmieder, 2008. "Stress Testing Credit Risk: Is the Czech Republic Different from Germany?," Working Papers 2008/9, Czech National Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Adam Gersl & Petr Jakubik & Tomas Konecny & Jakub Seidler, 2013. "Dynamic Stress Testing: The Framework for Assessing the Resilience of the Banking Sector Used by the Czech National Bank," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(6), pages 505-536, December.
    2. Adam Gersl & Zlatuse Komarkova & Lubos Komarek, 2016. "Liquidity Stress Testing with Second-Round Effects: Application to the Czech Banking Sector," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 32-49, February.
    3. repec:cnb:ocpubv:rb11/2 is not listed on IDEAS
    4. repec:cnb:ocpubv:rb10/2 is not listed on IDEAS
    5. Adam Gersl & Petr Jakubik & Tomas Konecny & Jakub Seidler, 2012. "Dynamic Stress Testing: The Framework for Testing Banking Sector Resilience Used by the Czech National Bank," Working Papers 2012/11, Czech National Bank.
    6. Hausenblas, Václav & Kubicová, Ivana & Lešanovská, Jitka, 2015. "Contagion risk in the Czech financial system: A network analysis and simulation approach," Economic Systems, Elsevier, vol. 39(1), pages 156-180.
    7. repec:cnb:ocpubv:rb12/2 is not listed on IDEAS
    8. repec:cnb:ocpubv:rb11/1 is not listed on IDEAS
    9. Konstantin Belyaev & Aelita Belyaeva & Tomas Konecny & Jakub Seidler & Martin Vojtek, 2012. "Macroeconomic Factors as Drivers of LGD Prediction: Empirical Evidence from the Czech Republic," Working Papers 2012/12, Czech National Bank.

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    More about this item

    Keywords

    E44; E47; G21;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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