• Source: Stochastic investment model

A stochastic investment model tries to forecast how returns and prices on different assets or asset classes, (e. g. equities or bonds) vary over time. Stochastic models are not applied for making point estimation rather interval estimation and they use different stochastic processes. Investment models can be classified into single-asset and multi-asset models. They are often used for actuarial work and financial planning to allow optimization in asset allocation or asset-liability-management (ALM).




Single-asset models






= Interest rate models

=
Interest rate models can be used to price fixed income products. They are usually divided into one-factor models and multi-factor assets.



One-factor models

Black–Derman–Toy model
Black–Karasinski model
Cox–Ingersoll–Ross model
Ho–Lee model
Hull–White model
Kalotay–Williams–Fabozzi model
Merton model
Rendleman–Bartter model
Vasicek model



Multi-factor models

Chen model
Longstaff–Schwartz model




= Term structure models

=
LIBOR market model (Brace Gatarek Musiela model)




= Stock price models

=
Binomial model
Black–Scholes model (geometric Brownian motion)




= Inflation models

=




Multi-asset models


ALM.IT (GenRe) model
Cairns model
FIM-Group model
Global CAP:Link model
Ibbotson and Sinquefield model
Morgan Stanley model
Russel–Yasuda Kasai model
Smith's jump diffusion model
TSM (B & W Deloitte) model
Watson Wyatt model
Whitten & Thomas model
Wilkie investment model
Yakoubov, Teeger & Duval model




Further reading


Wilkie, A. D. (1984) "A stochastic investment model for actuarial use", Transactions of the Faculty of Actuaries, 39: 341-403
Østergaard, Søren Duus (1971) "Stochastic Investment Models and Decision Criteria", The Swedish Journal of Economics, 73 (2), 157-183 JSTOR 3439055
Sreedharan, V. P.; Wein, H. H. (1967) "A Stochastic, Multistage, Multiproduct Investment Model", SIAM Journal on Applied Mathematics, 15 (2), 347-358 JSTOR 2946287

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