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Yet more on a stochastic economic model: Part 4: a model for share earnings, dividends, and prices

Published online by Cambridge University Press:  19 June 2017

A. D. Wilkie*
Affiliation:
InQA Limited, Dennington, Ridgeway, Horsell, Woking GU21 4QR, UK
Şule Şahin
Affiliation:
Department of Actuarial Sciences, Hacettepe University, Ankara 06800, Turkey
*
*Correspondence to: A. D. Wilkie, InQA Limited, Dennington, Ridgeway, Horsell, Woking GU21 4QR, UK. Tel: +44 1483 725984 or +44 1483 744826; E-mail: david.wilkie@inqa.com

Abstract

In this paper, we develop an extension to the Wilkie model, introducing share earnings and cover (earnings/dividends) as new variables, and deriving share dividends from them. Earnings are available from April 1962, but only for the Non-Financial index, and for the All-Share one only from 1992. We construct a Composite Earnings Index from these series. We then find a suitable annual time series model for changes in earnings, and then for cover, which is mean-reverting. We compare this new model with the original model, in which changes in dividends were modelled directly. We also investigate monthly data to give parameters for stochastic interpolation. We observe an unusual change in earnings over 2015–2016, consider the implications of this and show specimen simulations.

Type
Papers
Copyright
© Institute and Faculty of Actuaries 2017 

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References

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