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A Theory of Scenario Generation

Author

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  • Paul Schneider

    (University of Lugano - Institute of Finance; 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.

Suggested Citation

  • Paul Schneider, 2019. "A Theory of Scenario Generation," Swiss Finance Institute Research Paper Series 19-17, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1917
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    More about this item

    Keywords

    scenario generation; moment problem; quadrature; prediction; options;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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