Bootstrapping the economy -- a non-parametric method of generating consistent future scenarios

Müller, Ulrich A and Bürgi, Roland and Dacorogna, Michel M (2004): Bootstrapping the economy -- a non-parametric method of generating consistent future scenarios.

Abstract

The fortune and the risk of a business venture depends on the future course of the economy. There is a strong demand for economic forecasts and scenarios that can be applied to planning and modeling. While there is an ongoing debate on modeling economic scenarios, the bootstrapping (or resampling) approach presented here has several advantages. As a non-parametric method, it directly relies on past market behaviors rather than debatable assumptions on models and parameters. Simultaneous dependencies between economic variables are automatically captured. Some aspects of the bootstrapping method require additional modeling: choice and ransformation of the economic variables, arbitrage-free consistency, heavy tails of distributions, serial dependence, trends and mean reversion. Results of a complete economic scenario generator are presented, tested and discussed.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic scenario generator (ESG); asset-liability management (ALM); bootstrapping; resampling; simulation; Monte-Carlo simulation; non-parametric model; yield curve model
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C30 - General; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics

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