A Stochastic Investment Model for Actuarial Use in South Africa

TL;DR

This paper develops a stochastic investment model tailored for South African actuarial applications, incorporating economic variables from 1960-2018 to aid long-term financial planning for pension funds and insurers.

Contribution

It introduces a comprehensive stochastic model that captures economic relations and provides validated long-term forecasts specific to South Africa's financial environment.

Findings

Model successfully captures economic series dynamics

Parameters are stable over time

Model provides reliable long-term forecasts

Abstract

In this paper, we propose a stochastic investment model for actuarial use in South Africa by modelling price inflation rates, share dividends, long term and short-term interest rates for the period 1960-2018 and inflation-linked bonds for the period 2000-2018. Possible bi-directional relations between the economic series have been considered, the parameters and their confidence intervals have been estimated recursively to examine their stability and the model validation has been tested. The model is designed to provide long-term forecasts that should find application in long-term modelling for institutions such as pension funds and life insurance companies in South Africa