Synthetic Data: the Risk Manager’s New Gold, and How to Mine It

Like animal-friendly faux fur coats, synthetic data is manufactured – artificially created rather than resulting from actual events. It’s having a moment. Thanks to the failings of historical data during the pandemic, synthetic data approaches have been sprouting like mushrooms after the rain. In the financial services industry they’re being used for risk management and stress testing, as well as for verifying the adequacy of hedges. But if it simply replicates data patterns and may still miss outliers, do the benefits of synthetic data – including improved stress testing and enhanced hedging strategies – outweigh its flaws? That’s the subject of Alla Gil’s latest column for GARP, which you can read here.