Featured Product

    ECB Paper Introduces Structural Quantile VAR Model for Stress Testing

    November 18, 2019

    ECB published a working paper that presents a model for forecasting and stress testing with quantile vector autoregression (VAR). The authors have developed a quantile VAR model and used it to forecast and stress test the interaction between real and financial variables in the euro area.

    The paper develops the general quantile structural vector autoregressive framework. It provides the links with standard OLS structural VAR, derives the asymptotic distributions, and shows how to do forecasting with quantile structural VAR. Finally, it estimates the quantile VAR model for the euro area and performs a stress testing exercise and the counterfactual analysis before Lehman’s bankruptcy, before presenting the conclusions. Unlike standard VAR, which models only the average interaction of the endogenous variables, quantile VAR models their interaction at any quantile. The authors show how to estimate and forecast multivariate quantiles within a recursive structural system. The model is estimated using real and financial variables. The dynamic properties of the system change across quantiles. This is relevant for stress testing exercises, whose goal is to forecast the tail behavior of the economy when hit by large financial and real shocks.

    Unlike OLS VAR, quantile VAR models each quantile of the distribution. This provides the natural modeling environment to design particular stress scenarios and test the impact that they have on the economy. A stress scenario is just a sequence of tail quantile shocks, which can be chosen arbitrarily by the policy maker or calibrated to mimic previous crisis episodes. The authors find the presence of strong asymmetries in the transmission of financial shocks in the euro area, with negative financial shocks being particularly harmful when coupled with negative real shocks. By modeling the average interaction between the random variables, OLS VAR models miss most of these detrimental interactions.

     

    Related Link: Working Paper (PDF)

    Keywords: Europe, EU, Banking, Insurance, Stress Testing, Modeling, Quantile VAR Model, ECB

    Featured Experts
    Related Articles
    News

    APRA Reviews Repayment Deferral Plans, Identifies Best Practices

    APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.

    September 22, 2020 WebPage Regulatory News
    News

    ESAs Assess Risks to Financial Sector After COVID-19 Outbreak

    ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.

    September 22, 2020 WebPage Regulatory News
    News

    BoE Confirms Withdrawal of COVID Corporate Financing Facility

    BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.

    September 22, 2020 WebPage Regulatory News
    News

    ECB Allows Temporary Relief in Leverage Ratio Amid COVID-19 Pandemic

    ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.

    September 21, 2020 WebPage Regulatory News
    News

    ESAs Launch Survey on Templates for Product Disclosures Under SFDR

    ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).

    September 21, 2020 WebPage Regulatory News
    News

    ECB Proposes Integrated Reporting Framework to Reduce Burden for Banks

    ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.

    September 21, 2020 WebPage Regulatory News
    News

    EC Deems UK Framework for CCPs Temporarily Equivalent to EMIR Rules

    EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).

    September 21, 2020 WebPage Regulatory News
    News

    EBA to Phase Out Guidelines on Loan Repayment Moratoria

    EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.

    September 21, 2020 WebPage Regulatory News
    News

    EBA Provides Opinion on Definition of Credit Institution in CRR

    EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).

    September 18, 2020 WebPage Regulatory News
    News

    ECB Finalizes Methodology to Assess CCR and A-CVA Risk of Banks

    ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.

    September 18, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5820