I'm announcing a new personal project, called
pyesg - Python Economic Scenario Generator. Economic Scenario Generators, or ESGs, are used to simulate possible future markets, like stock prices, interest rates, or volatilities. Actuaries use ESGs to determine the potential values of insurance portfolios in the future. This helps them ensure that their companies will have enough money to pay claims even under the worst scenarios. Other professionals might use ESGs to understand how business decisions today could affect company value in the future. The Python ecosystem has amazing libraries for data analysis, machine learning, and many other fields, but not for generating economic scenarios. I hope that an ESG library for Python will make this type of analysis easier and more widely adopted.
Today, one of the most widely used economic scenario generators among actuaries is provided for free by the Society of Actuaries and the American Academy of Actuaries. It is an Excel file that is available here. This is a fantastic resource provided by these organizations, but suffers from the classic drawbacks of Excel, including lack of unit-testing, compatibility issues (it is a .xls file, not the more ubiquitous .xlsx or .xlsm files today), and speed issues (it takes roughly 7-8 minutes to generate a full set of scenarios.) One of the goals of
pyesg is to provide the same functionality as the Academy generator in a well-tested and fast python package.
I'm not aware of any comprehensive ESG library available for Python today. I think such a library should have the following components:
scipy, with optional plotting from
I expect that these objectives may shift or expand as I continue working on the library. Please let me know if you think anything is missing!
The project is in its early stages, but I've recently implemented the Vasicek interest rate model. At the moment, the API looks like this.
import pyesg # load a dataset of historical US Treasury rates, contained in pyesg.datasets # ust is a pandas dataframe of rates for various maturities, indexed by year and month ust = pyesg.datasets.load_ust_historical() # for this example, we'll train on the following data: # y - the 3-month US treasury rate # X - the time value of each observation, starting at zero, increasing by monthly steps y = ust.loc['3-month'].values X = np.full(len(y), 1/12).cumsum() # create a vasicek model object, just like you would create an estimator model from sklearn vasicek = pyesg.Vasicek() # fit the model by passing the X and y vectors; the model is now trained vasicek.fit(X, y) # sample future paths from the model # specify the number of scenarios (e.g. 1000) # length of projection (e.g. 30 years) # and time step (e.g. weekly, or 52 time-steps per year) scenarios = vasicek.sample(size=(1000, 30, 52))
We can almost always observe interest rates at key maturities, for example, bonds trading with maturies of 1, 2, 3, 5, 7, or 10 years. If we want to estimate the interest rate for an 8-year bond, we need to interpolate between the observed values. Simple techniques like linear interpolation are possible, but have certain obvious disadvantages - namely that the interest rate curve is non-linear. Instead, better techniques like the Nelson-Siegel and Nelson-Siegel-Svensson interpolators might give better results. Both interpolators are availabe in
import pyesg import matplotlib.pyplot as plt # load a dataset of historical US Treasury rates, contained in pyesg.datasets # ust is a pandas dataframe of rates for various maturities, indexed by year and month ust = pyesg.datasets.load_ust_historical() # we will be interpolating rates from the file: # y - the observed US Treasury rate for the given maturity for a select observation date # X - the maturity of the bond measured in years y = data.iloc[-10].values X = np.array([0.25, 0.5, 1, 2, 3, 5, 7, 10, 20, 30]) # create Nelson-Siegel and Nelson-Siegel-Svensson interpolator objects # then fit both models using the historical data ns = pyesg.NelsonSiegel() nss = pyesg.NelsonSiegelSvensson() ns.fit(X, y) nss.fit(X, y) # finally, we can plot the results fig, ax = plt.subplots(figsize=(10,7)) x = np.arange(1, 121) / 4 ax.plot(x, ns.predict(x), color='C1', label='Nelson-Siegel') ax.plot(x, nss.predict(x), color='C2', label='Nelson-Siegel-Svensson') ax.scatter(X, y) ax.legend(frameon=False, fontsize=12) for s in ['top', 'right', 'left']: ax.spines[s].set_visible(False) plt.show()
pyesg package is available on pypi, and can be installed quickly using:
pip install pyesg
If this project sounds interesting to you, I would love to hear your thoughts! I would also welcome contributions. You can reach me at email@example.com.