Hens Steehouwer

Correlations are an essential component of a risk management and investment decision framework. They determine how risk aggregates across different asset classes and liabilities into portfolio or balance sheet risk.

Coronavirus poses challenges for not only investors but also for financial models, and how to apply them.This paper aims to support investors as best as possible in their decision making.

The world is fighting a pandemic, the outbreak of COVID-19. The impact on our health, social lives, the global economy and financial markets is immense and at times almost surreal. Governments and central banks are taking drastic measures reminiscent of the Global Financial Crisis.

Our economic and asset return scenarios provide information about what the future might look like. But every now and then one needs to look back at how historical scenario sets compare to how reality has unfolded in terms of actual economic and financial market developments. Based on three years of data we evaluated the true out-of-sample quality of the density forecasts as provided by the Ortec Finance scenarios.

Business cycles are one of the defining characteristics of realistic market behaviour (“stylized facts”) in asset prices, yield curves and volatilities, as well as in the broader macro-economic environment. It is therefore important to take business cycles into account when making investment decisions.

In this paper we describe the latest version of our one-of-a-kind approach to constructing economic scenarios. The paper offers a historical perspective on decades of scenario innovations at Ortec Finance and it discusses both the methodological foundations of our latest approach as well as the practical way in which the scenarios are constructed.