Weighting Scenarios - A Discussion
Document ID: 2007-216 (previously Issue 1)
Published on: 31st May 2007
Author: Steven Morrison
This 3-page note, written in the form of a Q&A, discusses the technique of scenario re-weighting which has recently been proposed by some consultants as a method for ensuring that martingale tests and other validation tests are satisfied exactly. We argue that re-weighting does not necessarily produce ‘better’ valuations of options and guarantees and that the technique should be used with caution.
