Danish paper examines funding costs in stress test scenario
Model underscores importance of incorporating funding costs into stress tests
A Danish working paper has developed a method of including market information in stress tests.
Søren Korsgaard uses a model that estimates the initial "default distance" of a bank. The model identifies the change in default distance as a function of stress test losses, before updating the default distance. Korsgaard calculates the increase in funding costs based on the change in default distance.
In his paper Incorporating funding costs in top-down stress tests, Korsgaard's results assume that
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