Market Risk Modeling

Econometric forecasts for all market risk instruments under scenarios

Moody’s Analytics Market Risk Modeling service produces forecasts for market instruments under alternative, regulatory or idiosyncratic scenarios. We cover the full spectrum of market risk instruments, such as interest rates, foreign exchange rates, asset prices, and other instruments whose values are set in public markets.


The demand for forecasting and stress testing of market risk instruments has grown tremendously in recent years. Regulators have placed increased scrutiny on the process by which firms translate supervisory scenarios into relevant market variables. They often require cutting-edge econometric techniques and extensive model validation, which many firms have difficulty providing in a timely, transparent, and auditable fashion.

We solve this problem by producing consistent, transparent scenario-specific forecasts. By leveraging our extensive modeling experience and scenario capabilities, we offer a unique proposition to ensure a coherent and robust extension of stressed macro scenarios to relevant market risk factors. We employ a two-stage process to generate forecasts that ensure cross-consistency between projections for macroeconomic and financial series. The forecasts of the core drivers are produced in Moody’s Analytics country models under standard economic conditions and alternative assumptions provided by regulators, clients, or Moody’s Analytics scenarios. Market risk forecasts are conditional on macroeconomic assumptions and their equations are subject to detailed validation and robustness routines.

Applications

  • Stress testing
  • Strategic Planning
  • Financial Planning
  • Budgeting

Key Features

  • Covers all market instruments, such as interest rates, credit and default swaps, and other instruments.
  • Two-stage econometric forecast generation process for cross-consistency between projections for macroeconomic and financial series.
  • Plausible scenarios that simulate the impact of defaults, energy crises, and other events, on market risk instruments.
  • Fully specified equations backed by a transparent and documented methodology to meet internal and regulatory compliance needs.

Highlighted Coverage

  • Interest rate curves by currency/country and maturity
  • Swap rate curves by currency/country and maturity
  • Equity market returns and implied volatilities
  • Corporate CDS curves by industry/sector, rating class, and maturity
  • Corporate bond yields/spreads by industry/sector, rating class, and maturity
  • ABS, RMBS, CLO Securities: agency and non-agency by asset class and maturity
  • Sovereign CDS spreads by country and maturity
  • FX spot rates and volatilities
  • Commodity prices
  • Credit migration/rating transition