Chapter 18: modelling Flashcards
Operational issues that need to be considered to be included in a model
be well documented
be easily communicable, with clearly displayed results
have sensible joint behaviour of variables
be capable of independent verification
not be overly complex or time-consuming to run
be capable of development and refinement
be capable of being implemented in a range of ways
have an appropriate time period between projected cashflows, balancing the reliability of the output with the speed of running the model.
Steps to develop a deterministic model
- specify the purpose of the investigation
- collect, group and modify data
- choose the form of the model, identifying its parameters or variables
- ascribe values to the parameters using past experience and appropriate estimation techniques
- construct a model based on the expected cashflows
- test the model in order to identify any build errors, and correct if necessary
- check that the goodness of fit is acceptable (and attempt to fit a different model if the first choice does not fit well)
- run the model using estimates of the values of variables in the future
- run the model several times to assess the sensitivity of the results to different parameter values.
Steps to develop a stochastic model
Same process as a deterministic model but with the following additional steps:
choose a suitable density function for each of the variables to be modelled stochastically specify correlation between variables
run the model many times, each time using a random sample from the chosen density function(s)
produce a summary of the results that shows the distribution of the modelled results after many simulations have been run, e.g. at various confidence levels.
