Scenario generation for market risk models using generative neural networks

Abstract

In this research, we show how to expand existing approaches of generative adversarial networks (GANs) being used as economic scenario generators (ESG) to a whole internal model -with enough risk factors to model the full band-width of investments for an insurance company and for a one year horizon as required in Solvency 2. For validation of this approach as well as for optimisation of the GAN architecture, we develop new performance measures and provide a consistent, data-driven framework. Finally, we demonstrate that the results of a GAN-based ESG are similar to regulatory approved internal models in Europe. Therefore, GAN-based models can be seen as an assumption-free data-driven alternative way of market risk modelling.