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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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Stress Testing Monte Carlo Assumptions

Stress Testing Monte Carlo Assumptions

Chapter:
(p.60) Chapter 4 Stress Testing Monte Carlo Assumptions
Source:
Recreating Sustainable Retirement
Author(s):

Marlena I. Lee

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198719243.003.0004

Monte Carlo simulations are a useful financial planning tool serving several purposes. They are often used to forecast wealth outcomes into the future for the purposes of financial planning. One can input assumptions about returns, saving, and spending needs, and the simulation reports how likely these goals are to be achieved, given the assumptions of the model. Despite the evidence that returns are fat-tailed and that expected returns vary through time, most Monte Carlo alternative simulations assume returns are independent and identically normally distributed. This study incorporates new return patterns in retirement simulations to illustrate how common assumptions about returns impact the output of Monte Carlo simulations.

Keywords:   Stochastic modelling, risk analysis, financial planning, shock distribution, Monte Carlo model, simulation

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