Risk Markets Technology Awards 2021: Market scenario generator

Mark Saunders, Conning
Mark Saunders, Conning

Market scenario generator of the year: Conning

Conning’s Gems Economic Scenario Generator (ESG) is a multi-period, multicurrency stochastic simulation platform. It generates probabilistic distributions of possible future states of the global economy and financial markets, including the unexpected but plausible outcomes that are critical to assessing risk. 

Gems generates an internally consistent set of financial, economic and macroeconomic variables, including yields on sovereign and corporate bonds, multiple correlated common stock indexes, alternative investment classes and mortgage-backed bonds, as well as derivatives on interest rates, equities, inflation and foreign exchange. 

Gems parametrises the global economy quarterly as a single process, capturing dependencies and co-ordinated movements within and across economies. Twenty-four currency zones are currently covered, including Malaysian ringgit, Israeli shekel, and Mexican and Chilean peso. Additional economies can be introduced on demand. Validation reports are provided with each quarterly real-world parameterisation and comprise a standard cross-section of the analyses that are reviewed and reflected in the validation process. 

Gems offers both real-world and risk-neutral functionality. Real-world scenario parameterisations are delivered via a quarterly service. Additionally, a range of calibration and target parameterisation tools allows users to customise the economy within the cascade structure of the models to their own views and for additional analyses, such as stress-testing. The Target Parameterization Tool expands the universe of potential calibration targets to almost anything included in the simulation and gives users control over which variables in the parameterisation are to be changed. Users can also recalibrate the model by directly adjusting any combination of model parameters. 

Additional asset types can be introduced, either fixed income or index-based, with pricing and cashflow dynamics linked to the Gems economic models. There is no upper limit on the number of scenarios that the system can produce. Gems can be run with a choice of time steps, from annual to quarterly, monthly or daily. 

A command line interface and data extraction tool enables users to generate economic scenario files automatically, which can be seamlessly integrated using the required formats and conventions of downstream third-party risk management systems. 

Conning has recently implemented a global jump process within Gems, which affects equities, corporate bonds, inflation, GDP, unemployment and FX simultaneously. This allows finer control over the joint probability of severe events and increases the tail correlation across different asset classes and economies.

All Gems’ models and their parameters are documented and can be viewed and edited in the user interface.

Judges said:

  • “Conning takes a comprehensive scenario-generating approach with an advanced methodology.” “Improvements to the product in the last 12 months cover important practical issues like adjustment spreads and connections to finance.”
  • “A flexible and scalable platform with extensive coverage of assets and currencies. The company has done significant work on tail risk and correlation across different asset classes.”

Mark Saunders, director, risk solutions, Conning, says:

“The Gems ESG is a state-of-the-art multi-economy stochastic simulation platform that offers clients a critical understanding of how market risk affects their business. The wide range of derivatives and asset classes within the Gems ESG, combined with accounting and management decision modules, empowers Gems ESG users to test their business models and investment strategies under a wide variety of economic conditions. Recent developments in the software include the Gems Global Jump Process, which simulates economic ‘jumps’ across economies and asset classes to better reflect severe market shocks such as those experienced in 2020.”


Read more articles from the Risk Markets Technology Awards 2021 winners’ review

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