Historical Scenarios with Fully Flexible Probabilities

    Published On 01/03/2011
    Author Name : 
    Attilio Meucci
    Published Date: 
    Sunday, Nov 14, 2010
    Last Update: 
    Tuesday, Jan 25, 2011

    We discuss a methodology to enhance the flexibility of the scenario-based approach to risk management We change the probability of each scenario, and then we compute the ensuing p&l distribution and all relevant statistics such as VaR and volatility. The probabilities can be changed to reflect specific market conditions, advanced estimation techniques, or partial information, using Entropy Pooling in Meucci (2008). The implementation of this approach is trivial, as no costly repricing is needed