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

Published online by Cambridge University Press:  27 October 2015

A. D. Wilkie  and
Şule Şahin
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 01483 725984; E-mail: [email protected]
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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”.

Keywords

Wilkie modelInitial conditionsLong-term distributionNeutralising parametersSelect period
Type
Papers
Information
Annals of Actuarial Science , Volume 10 , Issue 1 , March 2016 , pp. 1 - 51
Copyright
© Institute and Faculty of Actuaries 2015 

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References

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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, 53–99.Google Scholar