Behavioral Economic Scenario Stress Testing

Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 1April 2, 2015

Behavioral Economic Scenario Stress Testing

Jos Berkemeijer, Managing Partner Symetrics

The value of economic scenariosfrom a risk perspective

Agenda


1. What is risk?

2. The new economic reality

3. Models

4. Looking forward?

5. BEST: Behavioral Economic Stress Testing

6. Key questions

7. Finally

What is risk? Estimating risks…..


How many bubbles are in a bottle of Champagne?

?

http://www.beekmanwine.com/prevtopam.htm

What is risk? Markowitz approach


Risk = σ

X ~ N(μ,σ2)

What is risk? Spread = Risk?


What is risk? Taleb’s risk definition


What company is most risky to invest in?

0

1

2

3

4

5

6

1 2 3 4 5 6 7 8 9 10

Stock price A Stock price B

Nassim Nicholas Taleb

Black SwansAntifragile

The new economic reality: low interest rates


The new economic reality: Real rate


Models: Linear thinking


• Input = Output

• The future is a linear extrapolation of the past

• ‘Mean reversion’

• ‘Herding’

• The best estimate for tomorrow is today

Think Different

http://www.apg.nl/en/apg-as-pension-provider

http://www.apg.nl/en/apg-as-pension-provider

Models: Evaluation by Guus Boender (†)


Source: De Actuaris : Uitspraken Guus Boender (1955 – 2014)

• We have the bad luck that this crisis since 2009fell outside the range of thousand

• A model cannot take into account thingsthat have not yet happened

• Non-normal distributions occur more frequently

• The probability tail is thicker

• We need more data

• Never consider models as absolute truth

http://www.ag-ai.nl/download/12253-19-2-opinie.pdf

Looking forward? Predictions fail


Dutch pension fund feasibility test =

Looking 60 years ahead….

http://www.toezicht.dnb.nl/en/2/6/51-233035.jsp

Looking forward? Informed decision making


• Predictions• ‘Beliefs’

• Understanding Risks• ‘Informed Decision Making’• ‘In Control’• ‘Countervailing Power’

1

2 N(μ,σ2) NL(μ,σ2,B,T)• Stochastic• ‘At Random’

• ‘Behavioral Rules’ • ‘Tail Risks’

BEST: Behavioral Economic Stress Testing


1. Oude modellen- Asset Classes- Scenarios defined

by experts

2. BEST Model- Asset Classes- Economic Data

+ =

+ =Scientific BehavioralAlgorithms1. Banks 2. Consumers3. Markets

A. More expressive powerB. Better understandingC. In Control

Beliefs

BEST consequences:

BEST: Examples of Economic Scenarios


1. Central Scenario

2. Recovery

3. Muddle Through

4. Stagflation

5. QE US Edition

6. QE ECB Edition

7. Nominal GDP Targeting

8. Credit Crisis

9. China stops buying US bonds

10.Yen Depreciation

BEST: Stresstesting


Regulatory stress testingMuch testing….., little stress?

BehavioralRules

BEST: EIOPA Pension fund stress test 2015


EIOPA Pension fund stress test

• EU-wide stress test among pension funds

• Establish test criteria

• selection NL pension funds,

by Dutch regulator (DNB)

• Macroeconomic stress scenarios

Gabriel Bernardino. Chairman EIOPA

With or without ‘Behavioral?

BEST: Stagflation 2015, Example


Risk-Return Development 2011-2015Average Dutch Pension FundScenario: Stagflation Period 2011-2015

Efficient Frontier 2011 – 2014

Average return 2011 – 2014

Stagflation without Behavioral rules

Stagflation with Behavioral rules

Sharpe

Sortino

Minimum Change

–

Period 2011-2015

Risk

Ave

rage

Ret

urn

BEST: Scenarios & Optimalisation


Risk Appetite Check

1. Capital requirements2. Minimal capital requirement3. Funding ratio

BEST: Is your pension fund ‘Economic Proof’?


Bad weather scenarios

Feasibility Test

Stresstesting Risk Appetite

Short term Long term

Required Capital Check ALM Study

Strategic Asset Mix

Critical Values III Critical Values I Critical Values II

Behavioral Economic Stress Test

0 year 15 year 60 year

BEST: Dynamic Investment Policy


BEST Informed Decision Making• Step by step to a dynamic investment policy: Economic Trigger Points• From ‘Damage Control’ to ‘preventive & timely adjustments’ : Economic Alert Indicators• Scenario reporting on a quarterly basis: Aside from Benchmarking, also Scenario-updates

tijd

Key Questions


What are your planned actions?

1. feasibility test 2015

2. ALM 2015

3. Stress test 2015?

4. ‘Holistic Balance Sheet’

5. Dynamic Investment Policy?

BEST or NOT SO BEST ?

1. Best of Class?2. Demonstrably ‘In Control’?3. Informed Decision Making?4. Countervailing Power?

Finally


Why stress test the old way,if you can do it the BEST way?

Contact Symetrics


Contact information

Branch Office

Symetrics B.V.De Corridor 5 C3621 ZA BreukelenThe NetherlandsTel. +31 34 671 5065W: http://www.symetrics.eu/

Corporate Office

Symetrics B.V.Het Rietveld 55a7321 CT ApeldoornThe NetherlandsTel. +31 55 201 8829W: http://www.symetrics.eu/

Contact information

Martijn van Eck, Managing Partner Tel. +31 6 525 68 [email protected]

Jos Berkemeijer, Managing Partner Tel. +31 6 46 12 [email protected]

Mrs. Anneke Stolk, Corporate SecretaryTel. +31 34 671 [email protected]

London, United Kingdom

Symetrics is a member of London FinTech Incubator Level39W: http://www.level39.co.uk/members

http://www.symetrics.eu/

http://www.symetrics.eu/

http://www.level39.co.uk/members

Behavioral Economic Scenario Stress Testing

Education

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risk perspective

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