Using Scenario Analysis for Risk Management

Scenario analysis is an essential tool for financial risk management and asset allocation. It can give an important a priori information to a risk or portfolio manager and helps to control the effect of price changes to a portfolio, especially those of potential market crashes. This article deals with the problem of providing a set of consistent and reliable scenarios which may also consider market forecasts given by a research department or other market specialists. Bond and share prices are described by a multi-factor stochastic model. The model is fitted and statistically examined using empirical data of the German Pfandbrief index (PEX) with maturities from one to ten years and the stock markets represented by the Dow Jones European stock market index (DJ Euro Stoxx 50) as well as the MSCI World Excluding EMU index (MSCI World ex EMU). A case study shows how this concept can be applied to risk management problems.     «

Scenario analysis is an essential tool for financial risk management and asset allocation. It can give an important a priori information to a risk or portfolio manager and helps to control the effect of price changes to a portfolio, especially those of potential market crashes. This article deals with the problem of providing a set of consistent and reliable scenarios which may also consider market forecasts given by a research department or other market specialists. Bond and share prices are de...     »