White Paper in Quantitative Finance

Panorama of stochastic models for Real World simulations in Finance

by Dr. Sébastien de Valeriola, François Ducuroir and Wim Konings

In the recent years the need for scenarios of financial Risk Drivers simulated under Real World (“RW”) probability measures has increased, driven, among others, by new regulations (e.g. Solvency II), materially changing market conditions (triggering the need for refined Strategic Asset Allocation studies), the development of new financial products, the introduction of new actuarial techniques, etc.

In this paper, we propose an overview of the usual methodological approaches which we consider during our consulting missions when faced with modeling requirements. This paper is obviously not exhaustive and covers, high-level, 11 typical features modelers may have to include in their RW simulation engines.

We have aimed at using a language as close to plain English as possible and to illustrate our choices with practical examples and intuitive interpretations so that this paper also addresses questions from our readers less familiar with mathematical finance.