Description: Explains considerations for stochastic modeling of credit spreads, inflation and exchange rate risk.

Description: Provides a metric based on the concept of "entropy" from information theory/signal processing, for modifying a stochastic scenario set to meet pre-defined targets on average across the set. Explains the concept and develops it in simple examples. Illustrates why an optimal adjustment to the scenario set is one that maximizes entropy. Provides guidelines to limit use of the technique appropriately and avoid invalid application of the tool.

Description: A paper entitled “A Regime-Switching Model of Long-Term Stock Returns” appears in the April 2001 issue of the North American Actuarial Journal. In it, Dr. Mary Hardy describes a model for future equity returns and some reasons why that model might better reflect real equity price movements than the often-used lognormal model. The purpose of this article is to apply a two-regime model to variable annnuity GMDB pricing and compare the results to those from a lognormal model.