Use Of Scenario Analysis Research Articles

Disclosures of banks’ sustainability reports, climate change and central banks: An empirical analysis with unstructured data

Climate change will impact the economy in the long term but also in the medium run potentially affecting financial stability and the whole economic system (Nyambuu & Semmler, 2023). Some studies suggested that climate change may hit financial actors even if there are few studies related to the role of banks’ sustainability disclosure and central banks’ mandates. This paper examines the sustainability reports disclosures of the banks listed on the FTSE Italia All-Share Italian Stock Exchange for the year 2021–2020. It applies five kinds of multivariate techniques on unstructured data using Iramuteq (www.iramuteq.org) and SAS Viya (www.sas.com). The article tries to assess how and whether banks are disclosing transition and physical risk, and how and whether they conducted scenario analysis through the lens of the Task Force on Climate-related Financial Disclosures (TCFD) framework. Even though banks provided environmental, social, and governance (ESG) disclosure, they paid scant attention to furnishing climate change information to market and central banks, and to prioritize their complying with international frameworks. The article addresses the main research gap in the literature review and focuses on the role of disclosures and central banks’ mandates, sustainability data gap and solutions through machine learning, analysis of deep uncertainty for monetary policy, and the use of scenario analysis when it is impossible to apply deterministic or probabilistic approaches and text mining for central banks in the context of unstructured data.

Scenario analysis as a decision-support tool: a maritime patrol case study

This article argued for the use of scenario analysis as a decision-support tool, regarding incentives and investments on either the development or the acquisition of new military systems. In particular, it presented a study on the maritime patrol operations scenario with the availability of synthetic aperture radar satellite images during its planning process. Through a proper analysis, the images may serve as a powerful subsidy for enhancing mission effectiveness and reducing costs. The effectiveness may be measured by the number of encountered vessels and the cost reductions may come from the fewer flight hours necessary for the mission through path optimization. As a conclusion, not only it was possible to observe clear improvements on the mission success, but also the potential this kind of analysis has for force sizing and capability development.

Gaps, biases, and future directions in research on the impacts of anthropogenic land-use change on aquatic ecosystems: a topic-based bibliometric analysis.

Anthropogenic land use change (ALUC) satisfies human needs but also impacts aquatic ecosystems. Aquatic ecosystems are intrinsically linked with terrestrial landscapes, an association that is already recognized as a key factor to address future research and effective governance. However, the complexity and range of the impact of ALUC in aquatic ecosystems have been fundamental challenges and have implicitly routed the analysis to particular segments, drivers, management, or effects of the theme. In this study, we present an attempt to frame the subject in a broader context through a topic-based bibliometric analysis. Our aim is to identify possible biases and gaps in the current scientific literature and detect the main topics that have characterized the theme. Our results show an unequal distribution of articles by country when we analyzed the authors' affiliation and also a slight increase in contributions from social and economic disciplines, although they are still underrepresented. Moreover, we distinguish topics whose prevalence seems to change, especially those topics where the use of scenario analysis and multi-stressors are considered. We discuss the main biases and gaps revealed by our results, concluding that future studies on the impact of ALUC on aquatic ecosystems should better integrate social and economic disciplines and expand geographic frontiers.

About Digital Transformation of the Enterprise in the Context of Systemic Economic Theory

The purpose of the article is to develop a model of digital transformation of an enterprise in the context of systemic economic theory. The relevance of the goal is determined by the large-scale transition of the world economy to digital functioning formats. Preliminary modeling of digital transformation will allow the enterprise to calculate the economic effect of its implementation, to identify changes in relations with its partners and competitors, the impact of these changes on the dynamics of the market value of resources and finished products. The objective of the article is to formulate a model that describes not only the digital transformation project itself, but also its relationship with the external environment of the enterprise, the processes of supply and sale of finished products. The article forms the hypothesis that the systemic economic theory allows you to create a model of digital transformation of the enterprise. This model has the following scientific novelty. 1. It substantiates the possibility and adequacy of the description of the relationships between the components of an economic tetrad (a complex of object, design, process and environmental systems) through a change in financial flows and indicators during the digital transformation of an enterprise. 2. The proposed model allows us to describe the impact of the digital transformation of the enterprise not only on its activities, but also on changes in the market environment of this enterprise, taking into account the changes in supply and demand for resources needed for the functioning of the transformed enterprise, as well as for the products it sells, resulting from the digital transformation of the enterprise. 3. Taking into account changes in the market environment surrounding the transformed enterprise allows integrating the mechanism of market competition into the economic tetrad. 4. The model of digital transformation of the enterprise allows you to explore the interactions of financial and economic processes that enhance and transmit the resulting effects of digital transformation along the vertical and horizontal of network space of economic tetrads. The proposed simulation will simplify the transition to digital transformation and the use of scenario analysis; increase the predictability of the results of digital transformation, reducing the risk of its negative consequences.

Scenario processes for socio-environmental systems analysis of futures: A review of recent efforts and a salient research agenda for supporting decision making

This paper reviews the latest research on scenarios including the processes and products for socio-environmental systems (SES) analysis, modeling and decision making. A group of scenario researchers and practitioners participated in a workshop to discuss consolidation of existing research on the development and use of scenario analysis in exploring and understanding the interplay between human and environmental systems. This paper presents an extended overview of the workshop discussions and follow-up review work. It is structured around the essential challenges that are crucial to progress support of decision making and learning with respect to our highly uncertain socio-environmental futures. It identifies a practical research agenda where challenges are grouped according to the process stage at which they are most significant: before, during, and after the creation of the scenarios as products. These challenges for SES include: enhancing the role of stakeholder and public engagement in the co-development of scenarios, linking scenarios across multiple geographical, sectoral and temporal scales, improving the links between the qualitative and quantitative aspects of scenario analysis, addressing uncertainties especially surprise, addressing scenario diversity and their consistency together, communicating scenarios including visualization methods, and linking scenarios to decision making.

Theory-infused and policy-relevant: On the usefulness of scenario analysis for international relations

ABSTRACT Foresight exercises are increasingly popular among different actors across the globe. Particularly in the context of uncertainties in world affairs, decision-makers are increasingly relying on forward-reasoning to inform their policy. Yet international relations (IR) scholarship is still hesitant to adopt a scenario-based approach. We argue for the use of scenario analysis as a complementary method that is both disciplined and creative. Through scenario analysis, IR scholars simultaneously remain rigorous and provide policy-relevant input that grasps the dynamics of unpredictability of real-world issues. The article discusses the Multiple Scenario Generation method as an unconventional but useful tool, elaborates on its theoretical considerations and concludes with four innovations that scenario analysis can provide for IR scholarship.

Scenario analysis for derivative portfolios via dynamic factor models

A classic approach to financial risk management is the use of scenario analysis to stress test portfolios. In the case of an S&P 500 options portfolio, for example, a scenario analysis might report a P&L of m in the event the S&P 500 falls 5% and its implied volatility surface increases by 3 percentage points. But how accurate is this reported value of m? Such a number is typically computed under the (implicit) assumption that all other risk factors are set to zero. But this assumption is generally not justified as it ignores the often substantial statistical dependence among the risk factors. In particular, the expected values of the non-stressed factors conditional on the values of the stressed factors are generally non-zero. Moreover, even if the non-stressed factors were set to their conditional expected values rather than zero, the reported P&L might still be inaccurate due to convexity effects, particularly in the case of derivatives portfolios. A further weakness of this standard approach to scenario analysis is that the reported P&L numbers are generally not back-tested so their accuracy is not subjected to any statistical tests. There are many reasons for this but perhaps the main one is that scenario analysis for derivatives portfolios is typically conducted without having a probabilistic model for the underlying dynamics of the risk factors under the physical measure P. In this paper we address these weaknesses by embedding the scenario analysis within a dynamic factor model for the underlying risk factors. Such an approach typically requires multivariate state-space models that can model the real-world behavior of financial markets where risk factors are often latent, and that are sufficiently tractable so that we can compute (or simulate from) the conditional distribution of unstressed risk factors. We demonstrate how this can be done for observable as well as latent risk factors in examples drawn from options and fixed income markets. We show how the two forms of scenario analysis can lead to dramatically different results particularly in the case of portfolios that have been designed to be neutral to a subset of the risk factors.

'Recycle versus buy' scenarios in manufacturing strategy decisions: an empirical study

This paper examines the 'recycle versus buy' decision-making process, which is becoming a critical decision area for companies operating in the plastics, paper, rubber and metal industries. Via the use of scenario analysis, applied in an in-depth case study that uses plastic buckets for packaging, decision alternatives and uncertainties are considered. The scenario analysis produced nested scenario logics, comprising four bases: volume of used-material collected; cost of used-material collection; cost of virgin material; and performance of new product made with high/low ratio of virgin material to recycled material, resulting in 16 possible scenario combinations. For each combination, market, technical and financial feasibility are examined. For each scenario, a single decision alternative was selected from these four possible decision alternatives: full backward integration, taper integration, partial integration and no integration.

The use of uncertain scenarios in disaster risk reduction: a systematic review

PurposeIn recent years, futures study methods, especially scenario analysis, are used to plan for disaster and emergency management. Scenario method is suitable for public level policy making. Scenarios generated alternative descriptive futures in all of the development field such as disaster studies. This paper aims to systematically review the articles that generated scenarios in disaster management to attain gaps, challenges and opportunities related to use of scenario analysis in disasters.Design/methodology/approachThis is a systematic review that was conducted based on the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) guidelines. The keywords that searched included “disaster,” “emergency,” “crisis,” “disruptive event,” “futures study,” “foresight,” “scenario,” “community-based scenario planning,” “participatory scenario planning,” “scenario planning” and “scenario analysis.” The Google Scholar, ISI Web of Science, Science Direct, PubMed and Scopus databases were searched.FindingsA total of 981 article gathered after initial search between electronic databases. At final step, only ten articles included in the study. The selected articles compared according to many aspects. Most of the scenarios that developed in disaster management and planning concentrated on climate change and flooding related hazards. Many of studies developed three or four scenarios that it seems the number is suitable for disaster planning.Originality/valueThe paper serves as an original guideline for disaster planning.

Anticipating the Future in Urban Water Management: an Assessment of Municipal Investment Decisions

Municipalities are confronted with future uncertainties when they need to take decisions about their ageing water infrastructure. Previous work that addressed future challenges of urban water management focused mainly on climate change. This article develops a comprehensive index for forward-looking decisions about urban water management, to assess the extent to which, and how, Dutch municipalities anticipate the future with their investment decisions on urban water infrastructure. Results are based on a systematic comparison of investment decisions of 40 Dutch municipalities (about 10% of the population). Findings show that: 1) the extent to which municipalities anticipate the future differs largely; 2) only half of the municipalities adopt a long time perspective; 3) there are no commonly applied robustness tests; 4) flexibility is not explicitly adopted; rather, different flexible measures are applied; and 5) a minority of municipalities develop strategic visions or scenarios for urban water management to support decisions. These results highlight important areas of attention for municipalities worldwide. First, the need to invest in ageing water infrastructure can be seized as an opportunity to establish futureproof urban water management. Furthermore, climate change should be integrated with other future uncertainties into water management decisions. Third, transboundary cooperation could potentially increase municipalities’ capacity to address uncertain futures and enhance learning. And last, increasing the use of scenario analysis and envisioning could help municipalities to prepare for the future. The index provided can be used for ex ante development and ex post assessment of investment decisions, to increase municipalities’ preparedness for the future.

ANALYSIS OF BUSINESS LENDING PROBLEMS IN UKRAINE

The paper considers and analyzes the reasons for the decline in lending in Ukraine. Bank business lending in Ukraine is characterized by high cost; the world's worst quality loans. Moreover, the low profitability (and even loss) of most businesses leads to a small number of creditworthy businesses. It is determined that for the first time in the history of observation, lending in UAH equivalent decreased in 2019. And the results of the calculations revealed that the strengthening of the hryvnia makes only half of the impact. Another factor is the decline in new lending. Based on the materials of banks' balance sheets and the content of their sites, the banks were identified where the lending decreased most significantly. The lending conditions are clearly less attractive than in banks where lending is increasing. A study of the data of the Bank of International Settlements showed that among the 43 countries of the world, as of 01.04.2019, the leaders in the growth of business lending are countries that show high economic growth, that is, mainly, emerging market economies. The paper hypothesizes that there is a positive effect of non-financial banking lending on economic innovation (measured through the Global Innovation Index), which is statistically confirmed. Also there was found a causal relationship between the fact a significant increase in business loans and a change in the country's Doing Business rating. For example, reducing credit indicators in the country by 8-18% per year lowers the ease of doing business by 4-6 positions. In this study there were generalized steps to overcome the reasons for the decline in lending in Ukraine and the desirable actions of bank employees in such conditions (sufficient diversification of loans by industry, active use of scenario analysis of customer business development, etc.). This made it clear that without significant involvement of the state, significant shifts in the area of business lending cannot be expected. Keywords: credit, non-financial sector, business lending, bank, enterprise, risk.

Scenario Analysis for Derivatives Portfolios via Dynamic Factor Models

A classic approach to financial risk management is the use of scenario analysis to stress test portfolios. In the case of an S&P 500 options portfolio, for example, a scenario analysis might report a P&L of −$1m in the event the S&P 500 falls 5% and its implied volatility surface increases by 3 percentage points. But how accurate is this reported value of −$1m? Such a number is typically computed under the (implicit) assumption that all other risk factors are set to zero. But this assumption is generally not justified as it ignores the often substantial statistical dependence among the risk factors. In particular, the expected values of the non-stressed factors conditional on the values of the stressed factors are generally non-zero. Moreover, even if the non-stressed factors were set to their conditional expected values rather than zero, the reported P&L might still be inaccurate due to convexity effects, particularly in the case of derivatives portfolios. A further weakness of this standard approach to scenario analysis is that the reported P&L numbers are generally not back-tested so their accuracy is not subjected to any statistical tests. There are many reasons for this but perhaps the main one is that scenario analysis for derivatives portfolios is typically conducted without having a probabilistic model for the underlying dynamics of the risk factors under the physical measure P. In this paper we address these weaknesses by embedding the scenario analysis within a dynamic factor model for the underlying risk factors. Such an approach typically requires multivariate state-space models that can model the real-world behavior of financial markets where risk factors are often latent, and that are sufficiently tractable so that we can compute (or simulate from) the conditional distribution of unstressed risk factors. We demonstrate how this can be done for observable as well as latent risk factors in examples drawn from options and fixed income markets. We show how the two forms of scenario analysis can lead to dramatically different results particularly in the case of portfolios that have been designed to be neutral to a subset of the risk factors.

Market-Driven Scenarios: An Approach for Plausible Scenario Construction

The use of scenario analysis to better understand portfolios has increased significantly since the global financial crisis. In this article, the authors describe a stress scenario framework and process that has been developed for risk management and investment management purposes. This hybrid framework, which the authors refer to as market-driven scenarios, works as follows. Scenario forecasts of key market indicators are first formulated by market practitioners. An econometric framework then uses these indicators as inputs to imply plausible shocks to a global set of risk factors. These factor shocks are finally put into a portfolio valuation engine, yielding hypothetical fund profit and loss (P&L) that can be decomposed into its underlying drivers. Key to the effectiveness of this approach is the cross-functional involvement of investors, risk managers, and economists. In conjunction, the authors define potential geopolitical or other macro events, specify potential economic outcomes, and translate them into shocks to key policy risk variables and risk model factors. The process is completed by applying the shocks to portfolios and evaluating whether P&L outcomes are consistent with fund mandates and whether positioning is deliberate, diversified, and scaled.

STRATEGIC FACTORS OF THE DEVELOPMENT AS DETERMINANTS OF COMPANY’S FINANCIAL SECURITY

Considering the complexity of problems connected with modern management of organizations, , the authors attempted to prove that the environment of the organization does significantly determine its development, functioning and financial security. The study was conducted with the use of scenario analysis , as well as trend extrapolation. The applied methods enabled investigation of macro – environmental factors of the organization in terms of their strategic effect on its functioning. The examined scenario analyses of the environmental status definitely proved that in the majority of analyses the key role is played by the international, economic and political and competitive areas.

“Imagine a World in Which”: Using Scenarios in Political Science

A crucial dimension of bridging the gap between international affairs scholarship and policymaking is the generation of substantive, policy-relevant research programs. We describe the use of scenario analysis as a valuable experiential and problem-based technique for developing innovative research ideas in political science. We focus especially on the scholarly and pedagogical potential of scenarios for doctoral students by describing the structured use of scenarios at the annual New Era Foreign Policy Conference. The features of scenario analysis that commend its use to policymakers also make it well suited to helping political scientists generate policy-relevant research programs. Scenarios are plausible and textured stories that help imagine how the future political-economic world could be different from the past in a manner that highlights policy challenges. Scenario analysis can throw into sharp relief overlooked, yet pressing questions in international affairs that demand focused investigation. In turn, the search for answers can shape important research programs geared toward providing actionable clarity in understanding contemporary global issues and challenges.

Regional Development Scenario Evaluation through Land Use Modelling and Opportunity Mapping

In the context of sustainable urban development, the application of selected indicators integrated with scenario simulation and analysis can contribute to evidence-based decision making. This paper discusses the application of land use modelling and opportunity mapping approaches to evaluate regional development scenarios for the Greater Dublin Region in the period to 2026 evolving from research initially developed with the Dublin Regional Authority. This involved the simulation of four different future regional development scenarios using an adapted version of the MOLAND model with opportunity maps based on combined spatial indicators corresponding to these scenarios. The results produce valuable information for policy makers and planners assisting the evaluation of the consequences of their decisions in both a spatial and temporal context. This paper aims to show how current and future planning and economic policy can make targeted and evidence-based policy interventions and achieve resource efficiencies through the use of scenario analysis.

Risk profiles for re-profiling the sovereign debt of crisis countries

Purpose– This paper aims to use a risk management approach for re-profiling of sovereign debt. It develops profiles that trade off expected cost of financing alternative debt structures against their risk. The risk profiles are particularly informative for countries facing sovereign debt crisis, as they allow us to identify, with high probability, debt unsustainability. Risk profiles for two eurozone countries with excessive debt, Cyprus and Italy, were developed. In addition, risk profiles were developed for a proposal to impose debt sanctions in the Ukrainian crisis and it was shown that the financial impact could be substantial.Design/methodology/approach– Using scenario analysis, a risk measure of the sovereign’s debt – Conditional Debt-at-Risk – was developed, and an optimization model was then used to trade off expected cost of debt financing against the Conditional Debt-at-Risk. The model is applied to three diverse settings from current crises.Findings– The methodology traces informative risk profiles to identify sustainable debt structures. Interesting, although tentative, conclusions are drawn for the countries where the methodology was applied. Cyprus’s debt sustainability hinges on current International Monetary Fund (IMF) projections about gross domestic product growth and small deviations can push debt into unsustainable territory. For Italy, our analysis provides evidence of debt unsustainability. Common assumption of debt by eurozone member states could restore sustainability for Italy. Finally, it is shown how a proposal to impose debt sanctions against Russia for the Ukrainian crisis could have significant financial impact for Ukraine.Research limitations/implications– Additional work is needed to calibrate the simulation models for each country separately. Nevertheless, the direction of the results is such that more careful calibration will most likely not alter the conclusions but make them stronger instead.Practical implications– The results provide significant insights for the management of sovereign debt for Cyprus and Italy. They also show the significant positive impact on Ukrainian public finances from debt sanctions. However, the most important practical implication is to show how the proposed methodology provided a decision support tool for restructuring and rescheduling sovereign debt for crisis countries.Social implications– There is widespread acceptance that debt restructuring has been too little and too late in recent crises failing to re-establish market access in a durable way. How to develop risk profiles for alternative debt structures has been illustrated. Debt profiles that are unsustainable can be identified, with high probability, and alternative structures proposed that restore sustainability. The methodology proposed in this paper is providing a useful tool of analysis. The topic of debt relief is currently debated widely at policy circles by the IMF and the United Nations, and the analysis of this paper provides some insightful input to the debate.Originality/value– The use of scenario analysis for sovereign debt modeling and the use of an optimization model developed by the authors in previous research provide empirical analysis for three current problems in sovereign debt management. Useful insights are obtained for three important real-world cases for Cyprus, Italy and Ukraine.

Preparing for Cyber Threats with Information Security Policies

Contemporary organisations in any industry are increasingly dependent on information systems. Today most organisations are online all the time, and their internal systems are used in environments that are already or easily connected to the internet. The paper analyses cyber threats and their potential effect on the operations of different organisations with the use of scenario analysis. The scenarios are built based on a literature review. One outcome of the analysis is that to an organisation it is irrelevant where a cyber threat originates from and who it is targeted for. If the threat is specifically targeted to the organisation or if the threat is collateral in nature is not important; preparing for the threat is important in both cases. The paper discusses the pressures that the cyber threats pose to information security policies, and what the role of the information security policy could be in preparing for the threats.

On the use of scenario analysis in combination with prescriptive fire safety design requirements

Experience with fire safety engineering under a performance-based fire safety regulation regime shows that the majority of the analyses performed are scenario based. A comparison with purely pre-accepted performance requirement is made in order to assess the relative safety level of the alternative design compared with the pre-accepted design. We find this approach problematic because it undermines the value of performing analyses. The approach accepts oversimplification and justifies unrealistic assumptions on the basis that it will not affect the comparison. This distances the analyses from reality and reduces their value to answer a yes/no question on acceptability. The considerable time and resources spent on searching for and analyzing a pre-accepted design could be spent on analyzing the design at hand. If fire safety analyses are to have any real impact on design, it is necessary that regulators strengthen the position of analytical design. This must include a provision of a clear set of performance goals, which are possible to transform into quantitative evaluation criteria by the engineers, to avoid comparisons with pre-accepted performance requirements.

Economists in a World of Shaky Recovery

An economist at Fannie Mae discusses the challenges facing the housing market and the role of economics in helping to inform decision makers in this key area. The use of scenario analysis and surveys are two examples of the types of activity currently underway. In the midst of a policy debate over the future of housing finance, there is a well focused effort to stabilize the system.