Stress tests vulnerable to ‘model risk’ – Bundesbank paper
Small changes in models can lead to big differences in results, researchers find
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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