Stochastic models let you discuss projected future values, such as annual pension incomes from different withdrawal strategies, in terms of how likely each one is to happen.
They work by assigning probabilities to specific outcomes, based on real world analysis, which are then run through hundreds of simulations.
The result is a range of possible outcomes, each ranked in terms of how likely it is to happen.
Nothing is guaranteed, but a result based on real world analysis is far more trustworthy than one which assumes nothing will change over 40 or more years.
Building a trustworthy stochastic modelling engine is not a simple undertaking.
The scale of initial analysis and ongoing effort that is needed to keep one working and passing repeated due-diligence checks is significant. Fortunately, there are some problems that you don’t need to solve yourself, especially where an excellent solution already exists.
There aren’t many companies that provide stochastic modelling engines, and there aren’t any who can equal the depth of experience and range of expertise that Moody’s Analytics provides, which is why we’ve partnered with them.
Their underlying engine is widely recognized as an industry standard for valuing and projecting assets and liabilities, and assessing risk and capital positions.
Moody’s Analytics, a unit of Moody’s Corporation, helps capital markets and credit risk management professionals worldwide respond to an evolving marketplace with confidence.
The company offers unique tools and best practices for measuring and managing risk through expertise and experience in credit analysis, economic research and financial risk management.
Their stochastic modelling tool is integrated into enterprise risk management platforms, consumer advice tools, and valuation processes around the world.