Stochastic simulation of international economic variables and asset returns: The Falcon Asset Model

M.A.H. Dempster and A.E. Thorlacius
Proceedings of the 8th International AFIR Colloquium. London: Institute of Actuaries (1998) 29-45

A model has been developed to simulate the complete range of investments available in global markets with the intended applications of risk analysis and strategic planning. This model simulates a range of economic variables which form the basis for asset class returns. Economic variables include price inflation, complete government interest rate curves, equity price/earnings ratios, equity earnings growth rates, gross domestic product levels, currency exchange rates, and other interest rate curves. The model simulates these variables for multiple currencies in a symmetric fashion. This paper will describe the intended applications of such a model, the structure of the model, the method of calibration of the model, and the integration of such a model into a complete risk management system.