This paper reviews the state-of-the-art of macro stress-testing methodologies.
Substantial progress has been made both in the econometric analysis of financial
soundness indicators and in the simulation of value-at-risk measures to assess
system-wide vulnerabilities. However, a number of methodological challenges
still remain concerning the correlation of market and credit risks over time and
across institutions, the limited time horizon generally used for the analysis
and the potential instability of reduced-form parameter estimates because of
feedback effects. Further research in this area might also focus on how to use
macro stress-testing techniques as an operational tool to incorporate financial
stability considerations into monetary policy decision-making.
JEL Classification Numbers: G21, G10, E37
Keywords: Macro stress-testing, financial soundness indicators, value at
risk, feedback effects