Sparse economic scenarios

35 Pages Posted: 22 Mar 2019 Last revised: 5 Aug 2020

See all articles by Paul Schneider

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Date Written: March 22, 2019

Abstract

We show how to reduce financial asset prices to low-dimensional scenario trees. Applied to time series, 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

JEL Classification: G13, G02, G17, C02, C14, C46, C52, C53

Suggested Citation

Schneider, Paul Georg, Sparse economic scenarios (March 22, 2019). Swiss Finance Institute Research Paper No. 19-17, Available at SSRN: https://ssrn.com/abstract=3358388 or http://dx.doi.org/10.2139/ssrn.3358388

Paul Georg Schneider (Contact Author)

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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