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A graphical model approach to simulating economic variables over long horizons

Oberoi, Jaideep S, Pittea, Aniketh, Tapadar, Pradip (2019) A graphical model approach to simulating economic variables over long horizons. Annals of Actuarial Science, . pp. 1-22. (doi:10.1017/S1748499519000022) (KAR id:67406)

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https://doi.org/10.1017/S1748499519000022

Abstract

We present an application of statistical graphical models to simulate economic variables for the purpose of risk calculations over long time horizons. We show that this approach is relatively easy to implement, and argue that it is appealing because of the transparent yet flexible means of achieving dimension reduction when many variables must be modelled. Using United Kingdom data as an example, we demonstrate the development of an economic scenario generator that can be used by life insurance companies and pension funds. We compare different algorithms to select a graphical model, based on p-values, AIC, BIC, and deviance. We find them to yield reasonable results and relatively stable structures in our example, suggesting that it would be beneficial for actuaries to include these models in their toolkit.

Item Type: Article
DOI/Identification number: 10.1017/S1748499519000022
Uncontrolled keywords: Graphical models; Scenario generators; Dimension reduction; Long-term risk management
Subjects: Q Science > QA Mathematics (inc Computing science)
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Mathematics, Statistics and Actuarial Science
Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Pradip Tapadar
Date Deposited: 24 Jun 2018 08:37 UTC
Last Modified: 07 Oct 2021 13:30 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/67406 (The current URI for this page, for reference purposes)
Oberoi, Jaideep S: https://orcid.org/0000-0002-1101-7612
Tapadar, Pradip: https://orcid.org/0000-0003-0435-0860
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