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This paper aims to introduce a model-based stress-testing methodology for Islamic finance products. The importance of stress testing was indeed clearly underlined by the adverse developments in the global finance industry. One of the key takeaways was the need to strengthen the coverage of the capital framework. Cognisant of this fact, Basel III encapsulates provisions to enhance the financial sector’s ability to withstand shocks arising from possible stress events, thereby reducing adverse spillovers into the real economy. Similarly, the Islamic Financial Services Board requires Islamic financial institutions to run stress tests as part of capital planning.

The authors perform thorough backtests on Islamic and conventional portfolios under widely used risk models, which are characterised by an underlying conditional volatility framework and distribution, to identify the most suitable risk model specification. Associated with an appropriate initial shock and estimation window size, the paper also conducts a model-based stress test to examine whether the stress losses estimated by the selected models compare favourably to the historical shocks.

The results suggest that the model-based framework, when combined with an appropriate risk model and distribution, can successfully reproduce past stress periods. The conditional empirical risk model is the most effective one in both long and short portfolio cases – particularly when combined with a long-enough estimation window. The relative performance of normal vs heavy-tailed distributions and symmetric vs asymmetric risk models, on the other hand, is highly dependent on whether the portfolio is long or short. Finally, the authors find that the Islamic portfolio is generally associated with lower historical stress losses as compared to the conventional portfolio.

The model-based framework eliminates some of the key problems associated with traditional scenario-based approaches and is easily adaptable to Islamic finance.

This paper aims to provide a methodology for designing and conducting solvency stress tests, under the standardised approach as per IFSB-15, including the establishment of macro-financial links, running scenarios with variation of assumptions and stress scenario parameters; apply and illustrate this methodology by providing a stylised numerical example through a tractable Excel-based framework, through which Islamic Commercial Banks (ICBs) can introduce additional regulatory requirements and show that they would remain in compliance with all capital requirements after a moderate to severe shock; and identify the potential remedial actions that can be envisaged by an ICB.

The paper uses the data of the one of the groups to which certain amendments and related assumptions are applied to develop a stylised numerical example for solvency stress-testing purposes. The example uses a Stress Testing Matrix (STeM; a step-by-step approach) to illustrate the stress-testing process. The methodology of the paper uses a two-stage process. The first stage consists of calculating the capital adequacy ratio (CAR) of the ICB using the IFSB formulae, depending on how the profit sharing investment account (PSIA) are treated in the respective jurisdiction. The second stage is the application of the stress scenarios and shocks.

Taking into account the specificities of ICBs such as their use of PSIA, the results highlighted the sensitivity of the CAR of an ICB with respect to the changes in the values of alpha and the proportion of unrestricted PSIA on the funding side. The simulation also indicated that an ICB operating above the minimum CAR could be vulnerable to shocks of various degrees of gravity, thus bringing the CAR below the minimum regulatory requirement and necessitating appropriate remedial actions.

The paper highlights various implications and relationships arising out of stress testing for ICBs, including the vulnerability of an ICB under defined scenarios, demanding appropriate immediate remedial actions on future capital resources and capital needs. The findings of the paper provide a preliminary discussion on developing a comprehensive toolkit for the ICBs similar to what is developed by the International Monetary Fund Financial Sector Assessment Programme.

This paper focuses on the gap with respect to the stress testing of capital adequacy. The main contribution of the paper is twofold. The first is the development of an STeM – a step-by-step approach, which provides a method for simulating solvency (i.e. capital adequacy) stress tests for ICBs; the second is the demonstration of the potentially crucial impact of profit-sharing investment accounts and the way they are managed by ICBs (notably the smoothing of profit payouts) in assessing the capital adequacy of the ICBs.

This study aims to render a fundamental assessment of the Basel II internal ratings-based (IRB) approach by taking readings of the Australian banking sector since the implementation of Basel II and comparing them with signals from macroeconomic indicators, financial statistics and external credit ratings. The IRB approach to capital adequacy for credit risk, which implements an asymptotic single risk factor (ASRF) model, plays an important role in protecting the Australian banking sector against insolvency.

Realisations of the single systematic risk factor, interpreted as describing the prevailing state of the Australian economy, are recovered from the ASRF model and compared with macroeconomic indicators. Similarly, estimates of distance-to-default, reflecting the capacity of the Australian banking sector to absorb credit losses, are recovered from the ASRF model and compared with financial statistics and external credit ratings. With the implementation of Basel II preceding the time when the effect of the financial crisis of 2007-2009 was most acutely felt, the authors measure the impact of the crisis on the Australian banking sector.

Measurements from the ASRF model find general agreement with signals from macroeconomic indicators, financial statistics and external credit ratings. This leads to a favourable assessment of the ASRF model for the purposes of capital allocation, performance attribution and risk monitoring. The empirical analysis used in this paper reveals that the recent crisis imparted a mild stress on the Australian banking sector.

Given the range of economic conditions, from mild contraction to moderate expansion, experienced in Australia since the implementation of Basel II, the authors cannot attest to the validity of the model specification of the IRB approach for its intended purpose of solvency assessment.

Access to internal bank data collected by the prudential regulator distinguishes this paper from other empirical studies on the IRB approach and financial crisis of 2007-2009. The authors are not the first to attempt to measure the effects of the recent crisis, but they believe that they are the first to do so using regulatory data.

The purpose of this paper is to explore the extent of the so-called “small-sample problem” within quantitative exchange-rate risk management.

The authors take a closer look at the frequency distribution of nominal price changes in the European foreign exchange markets.

The analysis clearly illustrates the risk of seriously underestimating the probability and magnitude of tail events when frequency distributions are derived from fairly short data samples.

The authors suggest that financial institutions and regulators should have an eye for the long-term historical perspective when designing sensitivity tests or “worst case” scenarios in relation to risk assessments and stress tests.

The authors add to the literature by analysing the distribution of nominal exchange-rate fluctuations on the basis of a unique quarterly data set for ten European exchange-rate pairs covering a time span of 273 years constructed by the authors. To the best of the authors' knowledge this is the first study on nominal exchange-rate changes for a large number of exchange-rate pairs based on quarterly data spanning almost three centuries.

To understand the roles of service‐related parameters, such as imposed cyclic strain amplitude and cyclic strain rate, on the stress relaxation behaviour of eutectic Sn‐Ag solder joints.

Cyclic shear straining with associated stress relaxation at the shear strain extremes imposed was carried out on pre‐strained eutectic Sn‐Ag solder joints with various cyclic shear straining conditions. Results from such experiments were compared with previously reported findings from monotonic shear straining and stress relaxation tests.

At higher testing temperatures with a larger cyclic strain amplitude, stress states realized at the subsequent cycle are comparable with, or even gradually increase on, those experienced at the previous cycle, especially after few cycles. The maximum shear stress obtained at each cycle and residual stress during stress relaxation are strongly affected by cyclic strain rate. Stress relaxation during subsequent cycles of straining was found to be strongly dependent on the test temperature, and the imposed cyclic strain amplitude and cyclic strain rate.

In this paper, the experiments were carried out on eutectic Sn‐Ag solder joints with about a 100 μm joint thickness, which are, therefore, representative of those used in microelectronics. Also, there is no systematic study reporting the effects of cyclic straining conditions on the stress relaxation behaviour of eutectic Sn‐Ag solder for this joint configuration in the published literature.

THE problems of fatigue testing are usually associated with the testing of specially machined specimens in a reverse loading machine such as the Whöler. Tests of this nature are designed to disclose the characteristic fatigue curve of the material freed from all imperfections necessitated in a mechanical structure by machining or design. The usual presentation of the results is, of course, in the form of the familiar S/N diagram, where the number of cycles required to produce a failure are plotted against the magnitude of the applied stress.

This study applies asymmetric rather than conventional symmetric analysis to advance theory in occupational psychology. The study applies systematic case-based analyses to model complex relations among conditions (i.e., configurations of high and low scores for variables) in terms of set memberships of managers. The study uses Boolean algebra to identify configurations (i.e., recipes) reflecting complex conditions sufficient for the occurrence of outcomes of interest (e.g., high versus low financial job stress, job strain, and job satisfaction). The study applies complexity theory tenets to offer a nuanced perspective concerning the occurrence of contrarian cases – for example, in identifying different cases (e.g., managers) with high membership scores in a variable (e.g., core self-evaluation) who have low job satisfaction scores and when different cases with low membership scores in the same variable have high job satisfaction. In a large-scale empirical study of managers (n = 928) in four (contextual) segments of the farm industry in New Zealand, this study tests the fit and predictive validities of set membership configurations for simple and complex antecedent conditions that indicate high/low core self-evaluations, job stress, and high/low job satisfaction. The findings support the conclusion that complexity theory in combination with configural analysis offers useful insights for explaining nuances in the causes and outcomes to high stress as well as low stress among farm managers. Some findings support and some are contrary to symmetric relationship findings (i.e., highly significant correlations that support main effect hypotheses).