A Stochastic Investment Model for Actuarial Use in South Africa

Abstract

The need for stochastic modelling is on the rise globally in the pension, life insurance and investment industries due to both an increase in regulation and a natural requirement for stochastic analysis in modelling exercises. Research in the area of stochastic models or recently called economic scenario generators for actuarial use in South Africa has largely been limited. The seminal papers in this regard have a number of practical limitations.In this paper, we propose a stochastic investment model for South Africa by modelling price inflation rates, share dividends, long term and short-term interest rates for the period 1960-2018 and inflationlinked bonds for the period 2000-2018. Possible by-directional relations between the economic series have been considered and the model is designed to provide long-term forecasts that should find application in long-term modelling for both pension funds and life insurance companies.