Stochastic Economic Models for Actuarial Use: An Example from China

Annals of Actuarial Science, 8(2), 374-403.

Posted: 8 Oct 2015

See all articles by Fei Huang

Fei Huang

Australian National University (ANU)

Adam Butt

Australian National University - Research School of Finance, Actuarial Studies & Statistics

Kin-Yip Ho

The Australian National University - School of Finance, Actuarial Studies and Applied Statistics, College of Business and Economics

Date Written: 2014

Abstract

In this paper, the first study of stochastic economic modelling with Chinese data is conducted for actuarial use. Univariate models, vector autoregression and two cascade systems (equity-driving cascade system and price-inflation-driving cascade system) are described and compared. We focus on six major economic assumptions for modelling purposes, which are price inflation rate, wage inflation rate, long-term interest rate, short-term interest rate, equity total return and bond total return. Granger causality tests are used to identify the driving force of a cascade system. Robust standard errors are estimated for each model. Diagnostic checking of residuals, goodness-of-fit measures and out-of-sample validations are applied for model selection. By comparing different models for each variable, we find that the equity-driving cascade system is the best structure for actuarial use in China. The forecasts of the variables could be applied as economic inputs to stochastic projection models of insurance portfolios or pension funds for short-term asset and liability cash flow forecasting.

Keywords: Chinese economic models; Stochastic modelling; Cascade systems

Suggested Citation

Huang, Fei and Butt, Adam and Ho, Kin-Yip, Stochastic Economic Models for Actuarial Use: An Example from China (2014). Annals of Actuarial Science, 8(2), 374-403., Available at SSRN: https://ssrn.com/abstract=2670407

Fei Huang

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Adam Butt (Contact Author)

Australian National University - Research School of Finance, Actuarial Studies & Statistics ( email )

Canberra, Australian Capital Territory 2601
Australia

Kin-Yip Ho

The Australian National University - School of Finance, Actuarial Studies and Applied Statistics, College of Business and Economics ( email )

Canberra, Australian Capital Territory 0200
Australia

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
447
PlumX Metrics