International Journal of Statistical Distributions and Applications
Volume 3, Issue 4, December 2017, Pages: 129-139
Received: May 28, 2017;
Accepted: Jun. 12, 2017;
Published: Jan. 16, 2018
Views 2355 Downloads 93
Evans Tee, Department of Business Administration, Regentropfen College of Applied Sciences, Bolgatanga, Ghana
Eric Dei Ofosu-hene, Department of Finance, University of Ghana Business School, University of Ghana, Legon, Ghana
The need for stochastic asset models has evolved from a common global standard for risk management in the Solvency II regime in Europe, IAIS Common Principles, Global ORSA standards NAIC, EIOPA, and OSFI. But the challenges in developing markets such as; lack of good quality data, inconsistent data coverage, market data not having long enough history, and lack of liquidity in certain parts of asset market have caused the absence of such models in Ghana. There have been a number of actuarial stochastic asset models designed for simulating future economic and investment conditions in several parts of the world. This study has discussed three of such models and determined which best fits the Ghanaian economic data. The data used for the empirical analysis in this study were taken from the Bank of Ghana database and the Ghana Stock Exchange. The study re-calibrated the models to derive the parameter set then compared the model results numerically after running 10000 simulations for 50 horizons. Investigations about the basic statistics of the simulated results for all the models are compared. The analysis revealed that all of the Ghanaian investment series used in the stochastic investment modeling are non-stationary in their mean, variance and auto-covariance. The study then found that the “Wilkie linear model” produced simulated values with similar characteristics to the historical data whiles the Whitten & Thomas TAR model produced simulated values with minimal forecast error. The study therefore suggests that since the “Wilkie linear model” has a relatively better parsimony, ready economic interpretation and its ability to mimic some important features of the Ghanaian economic series it deserves the attention of the actuary seeking to model jointly the behavior of asset returns and economic variables that matter in economic capital determination of insurance and pension business in Ghana.
Eric Dei Ofosu-hene,
Stochastic Asset Models for Actuarial Use in Ghana, International Journal of Statistical Distributions and Applications.
Vol. 3, No. 4,
2017, pp. 129-139.
M. Sherris, L. Tedesco and B. Zehnwirth, "Stochastic Investment Models: Unit Roots, Cointegration, State Space and GARCH Models," Actuarial Research Clearing House, vol. 1, pp. 95-144., 1997.
A. Ford et. al., "Report of the maturity guarantees working party," Journal of the Institute of Actuaries, vol. 107, pp. 103-212., 1980.
A. D. Wilkie, "Some applications of stochastic investment models," Journal of the Institute of Actuaries Students’ Society, vol. 29, pp. 25-51, 1986.
R. J. Thompson, "Stochastic investment modeling: the case of South Africa," British Actuarial Journal, vol. 2, pp. 765-801, 1997.
S. P. Whitten and R. G. Thomos, "A Non-linear Stochastic Model for Actuarial Use," British Actuarial Journal, vol. 5, pp. 919-953, 1999.
S. Hardwick and A. Bice, "An International Survey of Asset-Liability Solvency Management for Life Insurers.," AFIR, vol. 2000, 1999.
W. S. Chan and S. Wang, "The Wilkie Model for Retail Price Inflation Revisited," British Actuarial Journal, vol. 4, no. 3, p. 637–652., 1998.
A. D. Wilkie, "More on a Stochastic Asset Model for Actuarial Use," British Actuarial Journal, vol. 1, pp. 777-964, 1995.
M. D. Ross, "Modeling a with-profits life office," British Actuarial Journal, vol. 116, pp. 691-715., 1989.
I. D. Wright, "A stochastic asset model using vector auto-regression; Actuarial Research Paper No. 108.," Department of Actuarial Science and Statistics, City University, London, 1998.
M. Metz and M. Ort, "Stochastic models for the Swiss consumer's price index and the cost of the adjustment of pensions to inflation for a pension fund," International Colloquium, vol. 2, pp. 789-806, 1993.
R. Deaves, "Modelling and predicting Canadian inflation and interest rates," Canadian Institute of Actuaries, Ontario, 1993.
C. D. Daykin, T. Pentikainen and M. & Pesonen, Practical Risk Theory for Actuaries, Chapman & Hall., 1994.
E. Frees, Y. C. Kung, M. Rosenberg, V. Young and S. W. Lai, "Forecasting social security actuarial assumptions," North American Actuarial Journal, vol. 1, pp. 49-77., 1997.
R. J. Thompson, "A Stochastic Investment Model for Actuarial Use in South Africa," Transactions of the Actuarial Society of South Africa, Johanisberg, 1994.
M. Sherris, L. Tedesco and B. Zehnwirth, "Investment returns and inflation models: some Australian evidence," British Actuarial Journal, vol. 5, pp. 237-268, 1999.
P. J. Lee and A. D. Wilkie, "A Comparison of Stochastic Asset Models," in Proceedings of the 10th AFIR Colloquium, Tromsoe, 2000.
D. Kwiatowski, P. C. Phillips, P. Schmidt and Y. Shin, "Testing the null hypothesis of stationarity against the alternative of a unit root," Journal of Econometrics, vol. 54, p. 159–178., 1992.
S. Sahin, Stochastic investment models for actuarial use in the UK, Doctor of Philosophy thesis, Department of Actuarial Mathematics and Statistics, School of Mathematical and Computer Sciences, Heriot-Watt University, 2010.
F. Redington, "Review of the principles of life office valuations," Journal of the Institute of Actuaries, vol. 78, pp. 1-40., 1952.
P. P. Huber, "A review of Wilkie's stochastic investment model. Actuarial Research Paper No. 70.," City University, London, 1995.
G. E. P. Box and G. M. Jenkins, Time Series Analysis, Forecasting and Control, San Francisco: Holdon Day, 1976.
S. Potter, "A nonlinear Approach to U.S. GNP," Journal of Applied Econometrics, vol. 10, pp. 109-125, 1995.
C. Brooks, Introductory Econometrics for Finance, Cambridge University Press, 2008.
P. H. Franses and D. Van Dijk, Nonlinear Time Series Models in Empirical Finance, Cambridge University Press (Virtual Publishing), 200.
H. Tong, Non-linear time series: a dynamical systems approach, London: Oxford University Press, 1990.
H. Tong, "On a threshold model," in Pattern Recognition and Signal Processing, Amsterdam, 1978.
A. J. B. Cairns, "A multifactor equilibrium model for the term structure and inflation," in Proceedings of the 9th International AFIR Colloquium, Tokyo, 1999.
Y. Yakoubov, M. Teeger and D. B. Duval, "A stochastic investment model for asset and liability management," in Proceedings of the 9th International AFIR Colloquium, Tokyo.
J. Hibbert, P. Mowbray and C. Turnbull, "A Stochastic Asset Model & Calibration for Long-Term Financial Planning Purposes, Technical Report," Barrie & Hibbert Limited., 2001.
S. Sahin, A. J. G. Cairns, T. Kleinow and A. D. Wilkie, "Revisiting the Wilkie Investment Model," in Proceedings of the 18th AFIR Coloquium, Rome, 2008.
R. F. Engle, "Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation," Econometrica, vol. 50, pp. 987-1008., 1982.
P. Huber, "A Review of the Wilkie’s Stochastic Investment Model," British Actuarial Journal, vol. 3, no. 1, pp. 181-210., 1997.
C. D. Daykin and G. B. Hey, "Managing uncertainty in a general insurance company," J. I. A., vol. 117, pp. 173-277., 1990.