Sceneco

Sceneco is a state-of-the-art real-world and risk-neutral scenario generator covering a broad range economies and currencies.

Sceneco generates realistic and economically consistent real-world scenarios, and utilizes actual or calibrated volatility surfaces to generate risk-neutral scenarios. Sceneco provides convenient calibration and validation features, and the capability to generate scenarios on a need basis with latest market data. The development of Sceneco has benefited from academic and practitioners research and inspiring discussions with Michel Dacorogna, in particular the pioneering research conducted by him and his colleagues summarized in the book “An Introduction to High-Frequency Finance” has been instrumental in the design of the real-world methodology.

The range of supported variables includes:

Macroeconomics

  • GDP, unemployment, inflation, current account balance, disposable net income

Market

  • Equity, hedge fund, and private equity indices
  • Real estate indices
  • Foreign exchange rates
  • Real and nominal risk-free yields by currency, and maturity
  • Risky yields and spreads by currency, sector, rating class, and maturity
  • Bond, ABS, and MBS indices

Credit

  • Credit cycle by currency zone or country, and sector
  • Migration and default probabilities by currency zone or country, and sector

Transparency from data input to scenario generation.

Sceneco provides a fully transparent approach to scenario generation starting from input data to calibration and simulation.

  • Generation of consistent real-world and risk-neutral scenarios
  • Use of advanced financial and econometric models with realistic distributions and dependency models to ensure realistic scenarios
  • Modeling of stylized facts such as volatility clustering, mean-reversion, absence of arbritage
  • Advanced modelling approach to risk-free yield curve ensuring arbitrage-free forward rates (optional tolerance for slightly negative rates), term premium, and realistic volatility behavior
  • Advanced credit spread model driven by credit cycle
  • Cycle-dependent migration matrix based on historical Standard and Poor’s default and migration data and credit cycle model
  • Use of robust calibration techniques to ensure stationarity of simulated scenarios
  • Capability to adjust unbiased parameter calibrations with a-priori user expectations
  • Risk-neutral scenarios aligned with user-specified implied volatility surfaces
  • Scenario generation for user-defined simulation horizon and granularity (weekly, monthly, quarterly, yearly)

 

Economic scenarios are an integral part of the risk management tool set.

Stress Testing

Sceneco generates realistic scenarios that represent normal and stressed economic conditions. As a result, (forward) stress scenarios can be defined for single variables or groups of variables by conditioning their simulated values to stress outcomes. Sceneco assigns probabilities to designed stress scenarios consistent with historical data and user assumptions.

As a result, scenarios for a wide set of risk factors can be designed in a manner that their values are consistent with those of the risk factors that are within the scope of  CCAR or EBA stress tests.

Sceneco also supports identification of reverse stress scenarios, i.e. scenarios that result in a pre-specified critical portfolio loss. Sceneco achieves this by performing valuations of the portfolio for all simulated scenarios and identifying those scenarios that result in the critical portfolio loss, making Sceneco a powerful tool in identification and design of portfolio critical exposures and risk factors.

 

Market-Consistent Valuation

Risk-neutral scenarios provide the basis for the market-consistent valuation of insurance assets and liabilities. As valuation of life guarantees is dependent on the future development of the underlying risk factors, different paths of risk-neutral scenarios consistent with the implied volatilities observed at the time of valuation are required.

Sceneco generates risk-neutral scenarios that are consistent with the implied volatility surface assumptions. In case of a multi-currency setting, risk-neutral scenarios are computed either in the base currency or in the respective foreign currencies.

 

 

Best-of-breed technologies make it happen.

Sceneco is implemented in latest .NET technology. Sceneco leverages the power of .NET technology in both design and integration of powerful applications. It uses a client server architecture that supports multi-user workflow.

Sceneco utilizes entity framework to access data providing flexibility in integration with different database servers. To increase performance Sceneco is based on multi-threading programming ensuring computational speed in a multi-core environment.

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