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)

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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: Faculties > Sciences > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Faculties > Social Sciences > Kent Business School
Depositing User: Pradip Tapadar
Date Deposited: 24 Jun 2018 08:37 UTC
Last Modified: 12 Jul 2019 19:34 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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