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- Title
Vector Autoregression-Informed Monte Carlo Simulation.
- Authors
Fink, Jason D.; Fink, Kristin E.
- Abstract
Vector Autoregression (VAR) modeling of financial planning variables can provide key insights into the accumulation and spending policies of a range of investment portfolios at both an individual and institutional level, if coupled with Monte Carlo simulation. A standard-form VAR may be used to characterize the joint probability distribution of a range of variables that potentially interact dynamically, and can do so using simple least-squares techniques available in common spreadsheet programs. This article demonstrates how VAR-informed Monte Carlo simulation may be introduced to students in a simple, straightforward manner, using no more than commonplace spreadsheet tools. The use of VAR-informed Monte Carlo simulation substantially increases the range of variables financial practitioners can consider, and so can be a valuable addition to a business school graduate s set of skills. VAR-informed Monte Carlo simulation, while simple in implementation, may shed light on complicated dynamics between variables-dynamics that are missed by traditional Monte Carlo simulations.
- Subjects
MONTE Carlo method; BUSINESS school graduates; DISTRIBUTION (Probability theory)
- Publication
Journal of Financial Education, 2019, Vol 45, Issue 2, p156
- ISSN
0093-3961
- Publication type
Article