Project With Jean-François Bégin
A Monetary Policy-Based Economic Scenario Generator
An economic scenario generator (ESG)—which is also known as an investment model—is the basis for generating simulated asset returns and economic variables (e.g., interest rates, inflation, unemployment) in life insurance and pension. Broadly speaking, it is a parametric model that, based on past observations, captures the future joint behaviour of the economic variables relevant to the application under scrutiny. The notion of joint behaviour is critical to the concept of ESGs: the economic variables considered might be interrelated, and some of that dependence needs to be accounted for to understand the future state of the economy as a whole.
In a recent paper, Engle, Roussellet, and Siriwardane (2017) propose using a regime-switching model for interest rates based on a country’s observable monetary policy. This project extends this rationale to the other variables generally modelled as part of an ESG. Specifically, the student will put forward a new ESG and estimate it for different economies. The student will be responsible for the following, among others:
- Familiarizing themselves with the current literature on economic scenario generators (e.g., Wilkie, 1986; Ahlgrim, D’Arcy, and Gorvett, 2005).
- Understanding the generalization of Engle, Roussellet, and Siriwardane's model.
- Extracting data from commonly used datasets for multiple economies.
- Writing code to implement the model and estimate its parameters.
- Documenting all work.