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Recreating Sustainable RetirementResilience, Solvency, and Tail Risk$
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Olivia S. Mitchell, Raimond Maurer, and P.Brett Hammond

Print publication date: 2014

Print ISBN-13: 9780198719243

Published to Oxford Scholarship Online: December 2014

DOI: 10.1093/acprof:oso/9780198719243.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2019. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 18 November 2019

Implications for Long-term Investors of the Shifting Distribution of Capital Market Returns

Implications for Long-term Investors of the Shifting Distribution of Capital Market Returns

Chapter:
(p.30) Chapter 3 Implications for Long-term Investors of the Shifting Distribution of Capital Market Returns
Source:
Recreating Sustainable Retirement
Author(s):

James Moore

Niels Pedersen

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198719243.003.0003

While short-run forecasting has value for financial entertainment and speculation, in the United States and much of the developed world, there is perhaps no field where long-run forecasting has wider implications for personal welfare than that of forecasting asset returns. This chapter motivates and describes a regime-switching macro-driven simulation model for the purposes of simulating long horizon asset returns. The paths generated by this model are compared to more common approaches—multivariate normal generators and a block bootstrap simulation. Despite calibration to the same mean and variance in returns, the models display divergent behavior in the tails of long horizon return simulations. Simulations are run through representative defined contribution and defined benefit applications in order to examine the filtered behavior and draw inferences for future applied research and application.

Keywords:   Regime-switching, fat tails, extreme events, simulations, long horizon returns

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