Fully Flexible Probabilities

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Functions for Scenario Analysis and Risk Management

Oftentimes, the econometrician needs to stress-test the potential outcomes for a given set of risk-drivers. This process can be computationally costly when the entire set of scenarios needs to be repriced (bootstrapped, resampled, etc.).

To overcome this difficulty, the Fully Flexible Probabilities (FFP) approach offers an inexpensive way for scenario generation: it reprices the probabilities associated to each scenario, instead of the scenarios themselves. Once the new probabilities have been defined, the computations can be performed very quickly because the burden of scenario generation and valuation is left aside.

Installation

You can install the development version of ffp from github with:

# install.packages("devtools")
devtools::install_github("Reckziegel/ffp")

Probability Estimation

The package ffp comes with five functions to extract probabilities from the historical scenarios:

Scenario Analysis

Once the probabilities have been estimated, bootstrap_scenarios() can be used to sample data, while keeping the structure of the empirical copulas intact. The main statistics of arbitrary scenarios can be computed with empirical_stats().

References