PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

Volume XCII, Part 2 No. 177PROCEEDINGSNovember 13, 14, 15, 16, 2005MODELING FINANCIAL SCENARIOS: A FRAMEWORKFOR THE ACTUARIAL PROFESSIONKEVIN C. AHLGRIM, STEPHEN P. D’ARCY,AND RICHARD W. GORVETTAbstractThis paper summarizes the research project on Modelingof Economic Series Coordinated with Interest RateScenarios initiated by the joint request for proposals bythe Casualty Actuarial Society and the Society of Actuaries.The project involved the construction of a financialscenario model that simulates a variety of economicvariables over a 50-year period. The variables projectedby this model include interest rates, inflation, equity returns,dividend yields, real estate returns, and unemploymentrates. This paper contains a description of the keyissues involved in modeling these series, a review of theprimary literature in this area, an explanation of parameterselection issues, and an illustration of the model’soutput. The paper is intended to serve as a practicalguide to understanding the financial scenario model inorder to facilitate the use of this model for such actuarialapplications as dynamic financial analysis, development177