A New Heuristic Measure of Fragility and Tail Risks: Application to Stress Testing. By Nassim N Taleb et alii

A New Heuristic Measure of Fragility and Tail Risks: Application to Stress Testing. By Nassim N Taleb et alii
IMF Working Paper No. 12/216
Aug 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=26222.0

Summary:This paper presents a simple heuristic measure of tail risk, which is applied to individual bank stress tests and to public debt. Stress testing can be seen as a first order test of the level of potential negative outcomes in response to tail shocks. However, the results of stress testing can be misleading in the presence of model error and the uncertainty attending parameters and their estimation. The heuristic can be seen as a second order stress test to detect nonlinearities in the tails that can lead to fragility, i.e., provide additional information on the robustness of stress tests. It also shows how the measure can be used to assess the robustness of public debt forecasts, an important issue in many countries. The heuristic measure outlined here can be used in a variety of situations to ascertain an ordinal ranking of fragility to tail risks.

Global Housing Cycles. By Deniz Igan and Prakash Loungani

Global Housing Cycles. By Deniz Igan and Prakash Loungani
IMF Working Paper No. 12/217
Aug 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=26229.0

Summary: Housing cycles and their impact on the financial system and the macroeconomy have become the center of attention following the global financial crisis. This paper documents thecharacteristics of housing cycles in a large set of countries, and examines the determinants of house price movements. Empirical analysis shows that house price dynamics are mostly driven by income and demographics but fluctuations in these fundamentals and credit conditions can create deviations from the implied equilibrium path. We conclude with a discussion of the macroeconomic implications of house price corrections.