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The Journal of Alternative Investments

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Article

Are the Federal Reserve’s Stress Test Results Predictable?

Paul Glasserman and Gowtham Tangirala
The Journal of Alternative Investments Spring 2016, 18 (4) 82-97; DOI: https://doi.org/10.3905/jai.2016.18.4.082
Paul Glasserman
is the Jack R. Anderson professor of business at Columbia Business School in New York, NY.
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  • For correspondence: pg20@columbia.edu
Gowtham Tangirala
is a graduate student at Columbia Business School in New York, NY.
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  • For correspondence: gtangirala18@gsb.columbia.edu
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Abstract

Regulatory stress tests have become a key tool for setting bank capital levels. Publicly disclosed results for four rounds of stress tests suggest that as the stress testing process has evolved, its outcomes have become more predictable and therefore arguably less informative. In particular, projected stress losses in the 2013 and 2014 stress tests are nearly perfectly correlated for bank holding companies that participated in both rounds. The authors also compare projected losses across different scenarios used in the 2014 stress test and find surprisingly high correlations for outcomes grouped by bank or by loan category. Similar patterns apply to the 2015 results. The authors discuss the potential implications of these patterns for the further development and application of stress testing.

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The Journal of Alternative Investments: 18 (4)
The Journal of Alternative Investments
Vol. 18, Issue 4
Spring 2016
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Are the Federal Reserve’s Stress Test Results Predictable?
Paul Glasserman, Gowtham Tangirala
The Journal of Alternative Investments Mar 2016, 18 (4) 82-97; DOI: 10.3905/jai.2016.18.4.082

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Are the Federal Reserve’s Stress Test Results Predictable?
Paul Glasserman, Gowtham Tangirala
The Journal of Alternative Investments Mar 2016, 18 (4) 82-97; DOI: 10.3905/jai.2016.18.4.082
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  • Article
    • Abstract
    • BACKGROUND ON SUPERVISORY BANK STRESS TESTS
    • DATA
    • COMPARISON ACROSS SCENARIOS
    • PREDICTABILITY IN LOSS LEVELS
    • PREDICTABILITY IN LOSS RATES
    • STOCK MARKET REACTION TO STRESS TEST RESULTS
    • DISCUSSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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