Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/126566
Authors: 
Koziol, Philipp
Schell, Carmen
Eckhardt, Meik
Year of Publication: 
2015
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 46/2015
Abstract: 
In the last decade, stress tests have become indispensable in bank risk management which has led to significantly increased requirements for stress tests for banks and regulators. Although the complexity of stress testing frameworks has been enhanced considerably over the course of the last few years, the majority of credit risk models (e.g. Merton (1974), CreditMetrics, KMV) still rely on Gaussian copulas. This paper complements the finance literature providing new insights into the impact of different copulas in stress test applications using supervisory data of 17 large German banks. Our findings imply that the use of a Gaussian copula in credit risk stress testing should not by default be dismissed in favor of a heavy-tailed copula which is widely recommended in the finance literature. Gaussian copula would be the appropriate choice for estimating high stress effects under extreme scenarios. Heavy-tailed copulas like the Clayton or the t copula are recommended in the case of less severe scenarios. Furthermore, the paper provides clear advice for designing a credit risk stress test.
Subjects: 
credit risk
top-down stress tests
copulas
macroeconomic scenario
JEL: 
G21
G33
C13
C15
ISBN: 
978-3-95729-220-9
Document Type: 
Working Paper

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