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Predictable Dynamics

Predictable Dynamics

Global Economic Model – Prepare for Tomorrow

Endorsements from Academics

Assaf Zeevi, Henry Kravis Professor of Business, Columbia University, New York, USA:

“Ultimate Risk Solutions’ Global Economic Model, Predictable Dynamics, is a simple yet powerful dynamical systems-type model of macroeconomic evolution. It differs markedly from both Real Business Cycle (RBC) type models as well as most dynamic stochastic general equilibrium type models (DSGE’s). One significant trait of the latter two is their fine grain structure that typically is predicated on utility maximizing economic agents (and as such are also vulnerable to potential misspecification of their utility functions). Predictable Dynamics, in contrast, is more of an aggregate model that centers on the role of supply shocks that drive changes in the state of the economy according to a given dynamical system model which, among other things, also allows to incorporate monetary policy response.

Predictable Dynamics model is easy to interpret and explain, with few “moving parts,” and its parsimonious structure supports robust parameter inference and straightforward calibration to observed macro variables. It also lends itself to surprisingly accurate out-of-sample prediction. Especially noteworthy is its ability to capture the joint behavior across several economies, and as such it is well positioned to guide dynamic financial analysis that accounts for global cross-market dependencies.”

Why should your organisation be using a global economic model?

Risk Explorer™ is the most powerful, flexible and user friendly Dynamic Financial Analysis software currently available that can be quickly and easily set up for:

  • Success in today’s environment requires decisive action and foresight
  • Organisations, institutions and governments that fail to keep up with more agile competitors will be left behind in the international marketplace
  • Even with the best economic forecasts, policy makers cannot eliminate uncertainty in their plans and programmes
  • Risk is a factor of economic life that can be managed but not avoided

The Predictable Dynamics Global Economic Model from Ultimate Risk Solutions helps planners prepare for the future by allowing them to test strategic alternatives under many possible future economic scenarios. A reliable model of the economic environment is a key to success in the design of risk mitigation and hedging strategies.

Predictable Dynamics supports a consistent stochastic model of major macroeconomic variables over multiple economies and the currency exchange rates that arise from the ever-changing dynamics and trends in the global economy. The economic scenarios generated by the model are invaluable for evaluating policy options in many different settings, including government agencies and ministries, regulatory bodies, financial institutions, insurance companies and other corporations.

Predictable Dynamics quickly simulates large numbers of stochastic economic scenarios for the following variables:

  • GDP growth rate
  • Inflation rate
  • Unemployment rate
  • Wage growth rate
  • Investment as % GDP
  • Interest rate yield curve
  • Stock Market Indexes
  • Spot and forward Exchange Rates between currencies

At the heart of Predictable Dynamics is the Dynamic Equilibrium Model (DEM), which reflects the behavior of each economic zone as it responds to supply and demand shocks that create disturbances in the global economy. These shocks can affect the economy’s Aggregate Demand or Aggregate Supply, or both at once. The DEM comprises a system of equations that connect the various aspects of economic activity to changes in primary economic drivers.

The equations modulate the effects of supply shocks, subsequent market reactions (such as wage adjustment and change in productivity) and the possible interventions of regulatory institutions. The DEM can recreate historical supply shocks and their impacts on historical economic time series when the model is applied to historical data for its primary economic driver variables.

The DEM considers supply shocks as a single real driver that affects the “state of the economy”, yet it is able to reproduce the joint movements of several important economic variables over the historical period starting from 1950s with amazing accuracy.

The Dynamic Equilibrium Model has a remarkable ability to reproduce historical economic activity

Once calibrated, the model can create new scenarios by simulating future supply shocks and recalculating new sets of values for the economic variables. At each simulated year in the future path, both the collective and individual behaviors of variables remain consistent with their joint and individual historical evolution.

Predictable Dynamics generates thousands of consistent scenarios for future economic activity

Predictable Dynamics serves as a perfect complement to your existing planning, valuation and risk analysis tools. Economic scenarios from the model can be integrated naturally into other models to provide a comprehensive stochastic financial model that provides superior decision support for formulating policy, investment and risk management strategies.