Behavioral Economic Scenario Stress Testing

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Presentation (translated) by Jos Berkemeijer at the IPFOS 'Directors Conference" in the Netherlands.

Behavioral asset models are the most effective way of managing assets and liabilities risk in a financial institutions portfoilio. This presentation focuses on pension funds.

http://www.ipfos.eu/bestuurders-conferentie-2015/

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Behavioral Economic Scenario Stress Testing

  1. 1. 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 scenarios from a risk perspective
  2. 2. Agenda Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 2April 2, 2015 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
  3. 3. What is risk? Estimating risks….. Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 3April 2, 2015 How many bubbles are in a bottle of Champagne? ?
  4. 4. What is risk? Markowitz approach Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 4April 2, 2015 Risk = σ X ~ N(μ,σ2)
  5. 5. What is risk? Spread = Risk? Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 5April 2, 2015
  6. 6. What is risk? Taleb’s risk definition Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 6April 2, 2015 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 Swans Antifragile
  7. 7. The new economic reality: low interest rates Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 7April 2, 2015
  8. 8. The new economic reality: Real rate Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 8April 2, 2015
  9. 9. Models: Linear thinking Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 9April 2, 2015 • Input = Output • The future is a linear extrapolation of the past • ‘Mean reversion’ • ‘Herding’ • The best estimate for tomorrow is today Think Different
  10. 10. Models: Evaluation by Guus Boender (†) Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 10April 2, 2015 Source: De Actuaris : Uitspraken Guus Boender (1955 – 2014) • We have the bad luck that this crisis since 2009 fell outside the range of thousand • A model cannot take into account things that 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
  11. 11. Looking forward? Predictions fail Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 11April 2, 2015 Dutch pension fund feasibility test = Looking 60years ahead….
  12. 12. Looking forward? Informed decision making Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 12April 2, 2015 • 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’
  13. 13. BEST: Behavioral Economic Stress Testing Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 13April 2, 2015 1. Oude modellen - Asset Classes - Scenarios defined by experts 2. BEST Model - Asset Classes - Economic Data + = + = Scientific Behavioral Algorithms 1. Banks 2. Consumers 3. Markets A. More expressive power B. Better understanding C. In Control Beliefs BEST consequences:
  14. 14. BEST: Examples of Economic Scenarios Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 14April 2, 2015 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
  15. 15. BEST: Stresstesting Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 15April 2, 2015 Regulatory stress testing Much testing….., little stress? Behavioral Rules
  16. 16. BEST: EIOPA Pension fund stress test 2015 Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 16April 2, 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?
  17. 17. BEST: Stagflation 2015, Example Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 17April 2, 2015 Risk-Return Development 2011-2015 Average Dutch Pension Fund Scenario: 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 AverageReturn
  18. 18. BEST: Scenarios & Optimalisation Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 18April 2, 2015 Risk Appetite Check 1. Capital requirements 2. Minimal capital requirement 3. Funding ratio
  19. 19. BEST: Is your pension fund ‘Economic Proof’? Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 19April 2, 2015 Bad weather scenarios Feasibility Test Stresstesting Risk Appetite Short term Long term Required Capital Check ALM Study Strategic Asset Mix Critical Values IIICritical Values I Critical Values II Behavioral Economic Stress Test 0 year 15 year 60 year
  20. 20. BEST: Dynamic Investment Policy Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 20April 2, 2015 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
  21. 21. Key Questions Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 21April 2, 2015 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?
  22. 22. Finally Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 22April 2, 2015 Why stress test the old way, if you can do it the BEST way?
  23. 23. Contact Symetrics Pension conference The Netherlands - Presentation by Jos Berkemeijer - Symetrics©2015 23April 2, 2015 Contact information Branch Office Symetrics B.V. De Corridor 5 C 3621 ZA Breukelen The Netherlands Tel. +31 34 671 5065 W: http://www.symetrics.eu/ Corporate Office Symetrics B.V. Het Rietveld 55a 7321 CT Apeldoorn The Netherlands Tel. +31 55 201 8829 W: http://www.symetrics.eu/ Contact information Martijn van Eck, Managing Partner Tel. +31 6 525 68 775 vaneck@symetrics.eu Jos Berkemeijer, Managing Partner Tel. +31 6 46 12 0660 berkemeijer@symetrics.eu Mrs. Anneke Stolk, Corporate Secretary Tel. +31 34 671 5065 stolk@symetrics.eu London, United Kingdom Symetrics is a member of London FinTech Incubator Level39 W: http://www.level39.co.uk/members

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