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Yet more on a stochastic economic model: part 2: initial conditions, select periods and neutralising parameters

  • A. D. Wilkie (a1) and Şule Şahin (a2)

Abstract

In this paper, we consider a number of practical and theoretical aspects of the Wilkie asset model, many of which apply to any similar model used for simulation over time. We discuss the experience of the Wilkie model since 2009. We then discuss the variables that can form the working set, the input set and the output set, all of which may be different. There are different ways of simulating, either in a linear parallel structure or in a branching tree structure. We then discuss the initial conditions required, which may be market conditions at some date, or may be “neutral” initial conditions, which may be defined in different ways. One method of generating initial conditions would be to simulate them randomly, from their own long-term distribution, and we show how to calculate the means, variances and covariances of these. What we call “neutralising parameters” may have a role, and we discuss how these may be found. Finally, we suggest using additional information in the first periods of the simulation to adjust the formulae or parameters for a limited “select period”.

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Corresponding author

*Correspondence to: A. D. Wilkie, InQA Limited, Dennington, Ridgeway, Horsell, Woking GU21 4QR, UK. Tel: +44 1483 725984, or 01483 725984; E-mail: david.wilkie@inqa.com

References

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Bank of England (2014). Inflation Report, August 2014.
Lee, P.J. & Wilkie, A.D. (2000). A comparison of stochastic asset models. Proceedings of the 10th AFIR Colloquium, Tromsø, June, 407–445.
Wilkie, A.D. (1986). A stochastic investment model for actuarial use. TFA, 39, 341381.
Wilkie, A.D. (1995). More on a stochastic asset model for actuarial use. British Actuarial Journal, 1, 777964.
Wilkie, A.D., Şahin, Ş., Cairns, A.J.G. & Kleinow, T. (2011). Yet more on a stochastic economic model: part 1: updating and refitting, 1995 to 2009. Annals of Actuarial Science, 5, 5399.

Keywords

Yet more on a stochastic economic model: part 2: initial conditions, select periods and neutralising parameters

  • A. D. Wilkie (a1) and Şule Şahin (a2)

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