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Stress testing banks using the new Keynesian DSGE framework

Thesis Info

Author

Muhammad Shamil Akbar

Program

MS

Institute

Institute of Business Administration

Institute Type

Private

City

Karachi

Province

Sindh

Country

Pakistan

Thesis Completing Year

2019

Page

37

Subject

Economics

Language

English

Other

CallNo: 332.1

Added

2021-02-17 19:49:13

Modified

2024-03-24 20:25:49

ARI ID

1676720932478

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The frequent occurrence of financial crises and specifically the 2007-08 subprime global financial crisis brought a series of major macroprudential reforms in the regulation of financial institutions and markets. Among such reforms is to periodically gauge the resilience of institutions through stress testing and to mitigate system-wide risks. Stress testing is a risk management process in which various historical and hypothetical shocks are applied to test the resilience in worst-case scenarios. Over a period, there have been major advances in global financial markets and increased complexity in financial instruments and risk identification. As a result, stress testing methodologies have also improved from basic sensitivity analysis to sophisticated partial equilibrium models. The study employs the Dynamic Stochastic General Equilibrium (DSGE) model calibrated for Pakistan using the quarterly data for 02:2002 - 02: 2018. The DSGE model constructed three shock scenarios of technology, demand preference, and monetary policy and produced stressed forecasts. These forecasts were later used in the VAR model to come up with the future path of credit risk indicator (GNPLR) of the banks. Similarly, the forecasts based on VAR was also computed. It was found that the DSGE based stressed forecast of GNPLR tends to be slightly higher in the initial quarter and as time horizon increases, the deviation between forecasts tends to grow. It is expected that as DSGE models grow in coverage and include financial sector and risk transmission channels, there will be greater acceptability of these sophisticated measures in stress testing the banking sector
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36. Ya. Sin./Yaseen

36. Ya. Sin./Yaseen

I/We begin by the Blessed Name of Allah

The Immensely Merciful to all, The Infinitely Compassionate to everyone.

36:01
a. Ya. Sin.

36:02
a. The Qur’an - full of Wisdom is an evidence of the fact that -

36:03
a. truly, you - O The Prophet - are of The Messengers,

36:04
a. - guided upon the Right Path,

36:05
a. it is a revelation being sent down onto you by The Almighty, The Infinitely Compassionate,

36:06
a. so that you can warn a people whose forefathers were never warned,
b. so they have remained heedless of the true faith and right guidance.

36:07
a. Indeed, the Word of misguidance is bound to be true against most of them, so they are not going to believe.

36:08
a. Indeed, WE have placed iron collars around their necks, up to their chins, so their heads are upturned, aloft and made stiff-necked so as not to see the Right Path.

36:09
a. And WE have set a barrier in front of them and a barrier behind them,
b. thus WE have blindfolded them from all sides in the darkness of ignorance so they can no longer see the light of truth and guidance.

36:10
a. Thus, it is all the same to them whether you warn them, or do not warn them,
b. they are not going to believe.

36:11
a. However, you can only warn someone who
- follows the Reminder – The Qur’an - and
- remains in awe of The Immensely Merciful despite not...

مذہبی انتہا پسندی (غلو فی الدین): ایک تجزیہ

Religious extremism has become one of the main problems of the world today and many non-Muslims believe that religious extremism is synonymous to Islam. This article discussed the topic of religious extremism and presents the solution to the problem. The Quran used the word ‘Ghuluw’ which can fairly be translated as extremism. The term is defined as ‘elevating someone or something to a level higher than its true reality’. If we look carefully into Islamic teachings we will see that Islam does not approved extremism, especially with regard to religion. Islam not only disapproved extremism, but also urges us to be moderate and disassociate ourselves from extremism.

Performance of Time Series Models under Structural Discontinuities and Discordant Observations

Existence of outliers and structural breaks whose nature is mutually unknown, in time series data offer challenges to data analysts by causing problems in model identification, estimation and validation. Therefore, the detection of these outliers is an important area of interest in time series. We have investigated outlier detection in time series data using Chen and Liu (1993) and Kaiser and Maravall (2001) methods. We have focused on performance of these procedures in the presence of AO, IO, LS, TC and explored the impact of SLS for the case of SARIMA(p,d,q)(P,D,Q) for p, q=0,1,2; d=0,1; P,Q,D=0,1. The study adds to the literature by critically analyzing the performance of various test statistics for outlier detection under different scenarios using simulation strategy (MCMC) and by collecting empirical evidence from time series data for Pakistan. The evidence is collected by analyzing empirical level of significance, empirical critical values and empirical rejection frequency. We have also explored the confusion between LS, AO and IO, and between SLS and IO, the magnitude of TC that can be ignored and the appropriate critical value (c) for AO, IO, LS, TC and SLS for different sample sizes in various time series models. We also explore the swamping and masking effects of outliers by comparing the Chen and Liu (CL) method with Kaiser and Maravall (2001) procedure for multiple outliers. Our results indicate that the existence of various types of outliers in different time series models generate bias of different nature and is affected by the factors like size of outliers, sample size and cut-off points, and non-normality of the sampling distribution. The simulated empirical critical values are found higher than the theoretical cut-off points, with the empirical level of significance affected by sample size, outlier size and the model parameter coefficients. The empirical power of the test statistics is generally not satisfactory for small sample size, large cut-off points and xviiilarge model coefficient. The empirical analysis is carried out by running the outlier detection procedures on quarterly and monthly measured time series of Pakistan with five possible types of outliers i.e. AO, IO, LS, TC and SLS. The behavior observed for these variables supports our earlier findings. This study has shown that neglecting the SLS may lead to poor statistical analysis as other types of outliers may not fully grasp the impacts caused by SLS. Our simulation analysis does not support the argument of Kaiser and Maravall (2001) of replacing IO by SLS. Application of the method for detecting and removing outliers and structural breaks reduces the residual‟s excess kurtosis, skewness and JB test remarkably. A number of shocks in all series under observation are identified. Amongst which majority are supported by the graphical representation. Existing procedures of outlier detection may provide misspecified results leading to erroneous analysis. Therefore, these identified outliers require support from real world. Finding supportive evidence from real world is done by connecting the indicated discordant observations with historical evidences which may give better understanding. Several „no outlier‟ cases indicate the weakness of adopted procedures. It is concluded that all statistical analysis must include the exercise for outlier detection as it realizes the additional information contained by these aberrant observations, provide insight about policy implementation tools and enable better forecasts. The cut-off point may be set higher to reduce spurious detections. The test statistic for Transient Change should be revisited to have effective identification. Seasonal Level Shift may be included in the list of potential outliers.