A Theory of Scenario Generation

Paul Schneider
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Paul Schneider: University of Lugano - Institute of Finance; Swiss Finance Institute

No 19-17, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We show how distributions can be reduced to low-dimensional scenario trees. Applied to intertemporal distributions, the scenarios and their probabilities become time-varying factors. From S&P 500 options, two or three time-varying scenarios suffice to forecast returns, implied variance or skewness on par, or better, than extant multivariate stochastic volatility jump-diffusion models, while reducing the computational effort to fractions of a second.

Keywords: scenario generation; moment problem; quadrature; prediction; options (search for similar items in EconPapers)
JEL-codes: C02 C14 C46 C52 C53 G02 G13 G17 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019-03
New Economics Papers: this item is included in nep-ore and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1917

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