L
loadingr
Member
Hi,
It says in the notes that the risk-neutral calibration effectively use risk-neutral probabilities (which place a higher probability on the adverse scenarios than our best estimate real-world probabilities), in conjuction with a risk-free discount rate.
Does anyone see practice similar to this? Is this higher than best estimate probability for adverse scenario referring to the number of simulations with bad scenarios in ESG or a more prudent assumption in general (say deterministic assumptions)?
I am confused as the risk-free valuation is supposed to be used for realistic valuation like RBS and Solvency II. So why are we not using a best-estimate basis but a higher than best-estimate probability on adverse scenarios?
Many thanks!
It says in the notes that the risk-neutral calibration effectively use risk-neutral probabilities (which place a higher probability on the adverse scenarios than our best estimate real-world probabilities), in conjuction with a risk-free discount rate.
Does anyone see practice similar to this? Is this higher than best estimate probability for adverse scenario referring to the number of simulations with bad scenarios in ESG or a more prudent assumption in general (say deterministic assumptions)?
I am confused as the risk-free valuation is supposed to be used for realistic valuation like RBS and Solvency II. So why are we not using a best-estimate basis but a higher than best-estimate probability on adverse scenarios?
Many thanks!