Structural Agentics (SA) is a new way of making financial modeling, forecasting and valuation. It breaks from the traditional modeling by shifting the focus from the observed financial results to the underlying agent – the corporate and its actions – that produces the results.
Within the SA framework, a company’s action is influenced by three forces: the company’s innate drive to survive and thrive (the Mind), the structural constraint of capital and physical capacity that the company must operates in (the Body) and the external stochastic shocks (the Environment).
Instead of trying to find patterns in a company’s financial results as the traditional modeling approaches do, SA models a company’s decisional logic for its actions and the deterministic impacts of the actions to the company financials. In forecasting, SA simulates the uncertain external outcomes and the company’s adaptive responses, producing a distribution of hundreds of possible financial futures of the company. With SA’s simulative forecasting, valuations are emergent, not a proxy to existing market marks or past historical comparable.
For credit valuation in particular, SA defines default as the physical event of negative cash level, and derives the default probability from the frequency of the default event among the simulated futures. In such framework, the recovery rate of each debt seniority is dynamically determined from the balance sheet at the time of liquidity failure, inseparable from the way a company defaults. Credit spread curves are then derived endogenously for all seniorities. Even for equity, its forward book value can be computed as an integrated part of the capital structure.
Modtris is the software product that implements the SA’s modeling and simulation engine. It is programmed in high performance object-oriented language designed to facilitate real-time forecasting, valuation and investment decision making.