The Macro-Micro Model, Trends vs. Noise, and SSA - I

Abstract

The Macro Micro (MM) model contains different time scales and deals with risk as it occurs in the real world, especially trend risk. A new methodology - Singular Spectrum Analysis (SSA) – is introduced to identify historical trends, trend volatilities, and noise-reduced trend-trend correlations. Application is for a long-term PFE risk simulation, including realistic quasi-random Macro trends. Two Macro versions of the MM model are presented – a statistical trend model and a historic “time-slice” trend model.

Keywords: Macro, Micro, MM, time scales, real world, trend risk, Singular Spectrum Analysis, SSA, correlations, PFE, risk simulation, quasi-random, statistical trend model, historic “time-slice” trend

JEL Classification: C14, C63, E44, F65, G1