BIS on how to make stress tests better
New research by the Bank for International Settlements (BIS) looks at why stress tests failed to detect vulnerabilities in the run-up to the crisis and uses these findings to devise rules on how to build better models in future.
The research, written by Rodrigo Alfaro of the Central Bank of Chile, and Mathias Drehmann of the BIS, notes that pre-crisis tests included:
• assumptions that did not match output growth around many crises; and
• stress scenarios based on historical data which were not
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