Performance Scenario Calculations

Introduction
Performance scenario calculations provide investors with potential future performance outcomes under different market conditions. This blog will explore the methodologies and data used to calculate these scenarios.

Performance scenario calculations for PRIIPs include:

Sub-Interval Frequencies and Linear Transformation: To create comparable performance intervals, sub-interval frequencies and linear transformation are used. The regulation requires performance scenarios to be calculated at least on a monthly basis, and linear transformation is used to obtain performance in sub-intervals shorter than the recommended holding period. This approach ensures that the performance scenarios are based on a consistent and comparable set of data.

Unfavourable, Moderate, and Favourable Scenarios
These scenarios are calculated for different holding periods (1 year, half RHP, RHP). The intervals are created for each month, starting from 10 years ago and incrementing by one month at a time. The performance for each interval is assessed, and the scenarios are ranked from best to worst performing. The unfavourable scenario represents the worst-case performance, the moderate scenario represents the most likely performance, and the favourable scenario represents the best-case performance.

Stress Scenarios
Calculated using stressed volatility measures and expected values. The formula for the stress scenario is:

where ( W ) is the window length, ( sigma ) is the stressed volatility, ( N ) is the number of observations, ( z-alpha ) is the inverse of the normal cumulative distribution, ( mu1 ) is skewness, and ( mu2 ) is excess kurtosis. This formula accounts for the impact of extreme market conditions on the performance of the product.

Performance Scenario Calculations
The final values for the performance scenarios are calculated by taking into account explicit fees (entry and exit costs) and adjusting for incomplete years (for the unfavourable scenario). The scenarios are presented in both percentage and monetary values, providing investors with a clear picture of potential returns under various conditions. The calculations involve several steps:

1. Sub-Intervals Creation: For each holding period (1 year, half RHP, RHP), sub-intervals are created starting from 10 years ago and incrementing by one month at a time. This ensures that the performance scenarios are based on a consistent and comparable set of data.
2. Linear Transformations: Linear transformation is used to obtain performance in sub-intervals shorter than the recommended holding period. This approach ensures that the performance scenarios are based on a consistent and comparable set of data.
3. Annualised Performance Returns: The annualized performance returns for each sub-interval are calculated based on the end month prices. The formula used is:

This formula accounts for the length of each sub-interval and provides a consistent measure of performance.

4. Adjusted Annualised Returns: (for the unfavourable scenario): The annualized returns are adjusted for incomplete years to ensure accuracy. The adjusted annualized return value is calculated using the formula:

This adjustment ensures that the performance scenarios accurately reflect the impact of incomplete years.

5. Ranking Intervals: The intervals are ranked from best performing to worst performing for each holding period. This ranking helps identify the intervals that will be used to calculate the unfavourable, moderate, and favourable scenarios.

6. Calculating Scenarios: The final values for the performance scenarios are calculated by taking into account explicit fees (entry and exit costs) and adjusting for incomplete years. The scenarios are presented in both percentage and monetary values, providing investors with a clear picture of potential returns under various conditions.