Stress Testing and Risk Management of the Equity Market in New Zealand

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Andrew Maree
Andrew Maree
1 Reserve Bank of New Zealand

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The banking supervision sets out the need to conduct stress tests for the financial institutions in New Zealand. For the purpose of stress tests, the paper develops a methodology to calculate a series of severe but plausible economic scenarios. Five widely-used statistical distributions are investigated in fitting the return series of NZ 50. We show that the Skewed t distribution has the best goodness of fit and generates the most suitable stress test scenarios. Our approach could be an important component of sound risk management for the Reserve Bank of New Zealand. The financial institutions are expected to continue to develop their stress testing frameworks, and to use the results in our paper to inform their capital management and risk appetite setting processes.

Funding

No external funding was declared for this work.

Conflict of Interest

The authors declare no conflict of interest.

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No ethics committee approval was required for this article type.

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Not applicable for this article.

Andrew Maree. 2017. \u201cStress Testing and Risk Management of the Equity Market in New Zealand\u201d. Global Journal of Management and Business Research - B: Economic & Commerce GJMBR-B Volume 17 (GJMBR Volume 17 Issue B4): .

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GJMBR Volume 17 Issue B4
Pg. 13- 19
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Crossref Journal DOI 10.17406/GJMBR

Print ISSN 0975-5853

e-ISSN 2249-4588

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GJMBR-B Classification: JEL Code: C46; C58; G10
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September 23, 2017

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English

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The banking supervision sets out the need to conduct stress tests for the financial institutions in New Zealand. For the purpose of stress tests, the paper develops a methodology to calculate a series of severe but plausible economic scenarios. Five widely-used statistical distributions are investigated in fitting the return series of NZ 50. We show that the Skewed t distribution has the best goodness of fit and generates the most suitable stress test scenarios. Our approach could be an important component of sound risk management for the Reserve Bank of New Zealand. The financial institutions are expected to continue to develop their stress testing frameworks, and to use the results in our paper to inform their capital management and risk appetite setting processes.

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Stress Testing and Risk Management of the Equity Market in New Zealand

Andrew Maree
Andrew Maree Reserve Bank of New Zealand

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