Economic Scenario Generator is the cornerstone of a market-consistent valuation of the balance sheet and represents the appropriate tool to properly monitor and manage both market and credit risk from an integrated perspective, says Moody’s Analytics in a new report.
Moody’s Analytics report highlights its approach to scenario generation by using a case study in creating stressed simulations of Eurozone inflation, conditional on a very pessimistic set of assumptions for the European economy (a “bootstrapping” exercise).
“The purpose of this case study is to highlight the importance of macroeconomic analysis and statistical methods when dealing with macro and financial simulations. The results and methodologies developed in this exercise can be used in Pillar 1 and 2, Solvency Capital Requirements, ALM Strategy and other risk calculations”, says Juan Manuel Licari, Director of Economic and Credit Analytics in EMEA. “Macroeconomic modeling will be a pillar engine in Economic Scenario Generators (ESG) and other Solvency II calculations.”
“Through this approach Moody’s Analytics recognises the uncertainty associated with the forecasting process and properly allows for it by using an integrated framework that combines macroeconomic analysis with financial and credit metrics in a dynamic method that facilitates appropriate interactions among exogenous and endogenous variables,” explains Erlind Dine, Director at Moody’s Analytics.