Stress Testing Monte Carlo Assumptions
Published in Maurer, R., O. Mitchell, and P. Hammond (Eds.) (2014). Recreating Sustainable Retirement: Resilience, Solvency, and Tail Risk. Oxford, UK: Oxford University Press.
Posted: 8 Oct 2013 Last revised: 3 Apr 2020
Date Written: October 1, 2013
Despite the evidence that returns are fat-tailed and that expected returns vary through time, most Monte Carlo simulations assume returns are independent and identically normally distributed. This study incorporates these return patterns in retirement simulations to illustrate how common assumptions about returns impact the output of Monte Carlo simulations.
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