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Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing

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  #11  
Old 09-07-2010, 04:57 PM
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Stochastic modeling is useless here. We have no underlying probability distribution and no reason to believe that the future will resemble the past. Anyway, how much past experience is relevant? Ten years? Thirty?

Bruce
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  #12  
Old 09-07-2010, 05:12 PM
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I go back to the 1600s....
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  #13  
Old 09-07-2010, 06:28 PM
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Stochastic modeling is useless here. We have no underlying probability distribution and no reason to believe that the future will resemble the past. Anyway, how much past experience is relevant? Ten years? Thirty?

Bruce
Bruce, I think your remark can apply to much of capital markets modeling, and that's a skepticism I have a lot of sympathy for. Would you suggest that stochastic yield curves, or stochastic spreads, or stochastic defaults are also useless? I am not trying to be argumentative -- just picking your brain.
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  #14  
Old 09-07-2010, 07:25 PM
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The CPI just doesn't behave probabilistically. It's subject to political influence and all sorts of other effects. It simply can't be modeled in a way that has any credibility. Even the people who do such things for a living haven't demonstrated any capability.

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  #15  
Old 09-08-2010, 01:58 AM
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This is the answer, pure and simple. Using history to predict it is pointless.
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  #16  
Old 09-08-2010, 09:06 AM
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Originally Posted by bdschobel View Post
Stochastic modeling is useless here. We have no underlying probability distribution and no reason to believe that the future will resemble the past. Anyway, how much past experience is relevant? Ten years? Thirty?

Bruce
We know the variance. And that it's not correlated with much of anything. My point was that the answer needs to be a range, not a single point value.
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  #17  
Old 09-08-2010, 09:11 AM
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We know the variance....
We don't know the variance. We can see the past, that's all. And we have no idea how relevant it is to the future.
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This is the answer, pure and simple. Using history to predict it is pointless.
Amen.

Bruce
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  #18  
Old 09-08-2010, 09:16 AM
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Is he making prediction or trying to get a market price of an embedded CPI option? I don't know how deep the market is or how far it goes out but there are CPI options to calibrate to.
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  #19  
Old 09-08-2010, 09:19 AM
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Actually, since he also asked about health care inflation rates, I suspect he was working on some sort of earnings forecast.
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  #20  
Old 09-08-2010, 11:04 AM
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A lot of times, the best one can do is simply provide the results from various scenarios.

Historical scenarios might be a good place to start, especially extreme scenarios we've seen in the past.

If it's happened before, chances are good it can (and will) happen again.
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