Stress tests vulnerable to ‘model risk’ – Bundesbank paper

Deutsche Bundesbank headquarters, Frankfurt
The Deutsche Bundesbank
Fabian Stürtz

Small modifications to stress-test models can lead to very large differences in the eventual results, a working paper published by the Deutsche Bundesbank finds.

In Model and estimation risk in credit risk stress tests, Peter Grundke, Kamil Pliszka and Michael Tuchscherer use several versions of a model based on the CreditPortfolioView type commonly used in assessing banks’ strength. They test the model using US macroeconomic and financial sector data from 2004–16.

The authors find that making

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