Stochastic Asset Models for Actuarial Use in Ghana

Abstract

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.

A Stochastic Investment Model for Actuarial Use in South Africa

“…1.3 There is a well developed literature on the Wilkie model which discusses, criticises and introduces similar models for different countries (see S ¸ahin, 2010 for an extensive summary and Tee & Ofosu-Hene, 2017;Zhang et al, 2018) for recently developed Wilkie type models for Ghana and the US). However, we focus on the South African stochastic investment models in this paper since the aim is to construct an updated stochastic investment model based on South African data to be used in long-term forecasting of economic variables.…”