The subprime crisis has reminded us that effective stress tests should not only combine subjective scenarios with historical data, but also be probabilistic. In this paper, we combine three hypothetical shocks, of varying degrees, with more than six years of daily data on USD-INR and Euro-INR....

The stress tests recommended by most central banks, for their supervisory review process, do not consider the probability of occurrence of the abnormal shocks. They also focus on worst-case scenarios and typically ignore the diversification benefits in a trading portfolio. However, stress tests...

In the wake of Basel II, stress tests are recommended by most central banks, for their supervisory review process. However, most of these tests fail to consider the probability of occurrence of the shocks. Using data on USD-INR and GBP-INR between January 2000 and February 2001, we couch stress...

A large body of literature has blamed moral hazard behaviour by banks, for triggering the recent global financial crisis. Many reasons have been cited for such incentive distortion, e.g. the originate-to-distribute approach, regulatory capital arbitrage or the possibility of systemic bailouts....

The global financial crisis has reminded us that effective stress tests should not only be probabilistic, but also consider risk interdependence. In this paper, we combine two hypothetical shocks, of varying degrees, with more than fifteen years of fortnightly data on deposits, borrowings and...