Building forward-looking scenarios: why you’re doing it wrong
Rick Bookstaber and colleagues describe a process for constructing effective scenarios
A scenario is more than a number: it is a narrative. And constructing the scenario is akin to writing a novel. At its heart is a plotline that twists and turns, driving the reader forward. It has a catalyst that gets the action going. Its setting is the market environment: perhaps investor exuberance and leverage, tight money and credit constraints, or high concentration and momentum.
Financial risk managers can use a multi-pronged process to build scenarios. First, we identify a catalytic
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