Finance Department

 

Date of this Version

1998

Document Type

Article

Citation

Journal of Actuarial Practice 6 (1998), pp. 149-172

Comments

Copyright 1998 Absalom Press

Abstract

Wilkie's stochastic investment model and its variants have been increasingly applied by actuaries around the world to actuarial modeling and simulation. This paper performs time series outlier analysis on retail price inflation, which is the driving force of Wilkie's composite model. The data come from four developed countries: the United Kingdom, the United States, Canada, and Australia. The fit of the model is significantly improved after the adjustment of outliers. The analysis also identifies exogenous events that have intervened in the inflation dynamics. An example is given to demonstrate the importance of outlier analysis on stochastic simulation. Finally, inflation trends for these four countries are examined. The results suggest caution in the use of the 4 percent inflation assumption of some U.K. and Australian actuaries.

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