Integrating Solvency And Liquidity Stress Tests The Use Of Markov Regime Switching Models

Download or read book Integrating Solvency and Liquidity Stress Tests: The Use of Markov Regime-Switching Models written by Mr.Fei Han and published by International Monetary Fund. This book was released on 2019-11-15 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper presents a framework to integrate liquidity and solvency stress tests. An empirical study based on European bond trading data finds that asset sales haircuts depend on the total amount of assets sold and general liquidity conditions in the market. To account for variations in market liquidity, the study uses Markov regime-switching models and links haircuts with market volatility and the amount of securities sold by banks. The framework is accompanied by a Matlab program and an Excel-based tool, which allow the calculations to be replicated for any type of traded security and to be used for liquidity and solvency stress testing.