MCFAM Seminar: New Developments in Economic Scenario Generator Modelling

Speaker: Jean-François Bégin, PhD, FSA, FCIA

Abstract: Over the last 40 years, various frameworks have been proposed to model economic and financial variables relevant to actuaries. These frameworks—called economic scenario generators—are comprehensive models that allow actuaries and risk managers to grasp the long-term uncertainty underlying financial market values and economic variables. Their primary aim is to generate a set of future scenarios covering a range of plausible outcomes. The main end-users of these frameworks are pension, life insurance, and banking practitioners. In this presentation, we explore two important modelling questions relating to economic scenario generators and their use: model uncertainty and model averaging.

Given today’s knowledge and technology, one could construct complicated frameworks to fit the data better. However, this process would lead to highly parametrized models, which goes against the idea of parsimony in statistics—the desire to explain phenomena using fewer parameters. The first part of this presentation investigates this tradeoff: would a more complex economic scenario generator perform better, or would a simple model accomplish the same performance? To answer this question, we propose a new complex generator that nests versions of well-known actuarial frameworks. We then assess whether complex models perform better than simple models using both in- and out-of-sample analyses.

Second, we investigate model averaging. This strategy has been used extensively in data-heavy domains such as weather forecasting and in fields where forecasts come from diverse methods and datasets, such as election polls. In our context, we answer whether we can create better, more reliable economic scenario generators by combining them. This part of the presentation considers a recently proposed Bayesian averaging technique and data from multiple countries.

Bio: Dr. Jean-François Bégin is an Associate Professor of Actuarial Science in the Department of Statistics and Actuarial Science at Simon Fraser University in British Columbia, Canada. He is a specialist in financial modelling as well as statistical and mathematical applications to finance and insurance. Before joining Simon Fraser University, he received his PhD from HEC Montréal in Financial Engineering. He is also a Fellow of both the Society of Actuaries and the Canadian Institute of Actuaries.

Over the past few years, his research program focused on four main areas: the construction, estimation, and implementation of complex models for long-term economic predictions, the understanding and management of credit risk, the modelling of option pricing, their hedging, and their use in risk management, and the development of sustainable retirement solutions and designs.

MCFAM Seminars