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Yet more on a stochastic economic model: Part 3B: stochastic bridging for retail prices and wages

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  • Wilkie, A. D.
  • Åžahin, Åžule

Abstract

This is the second subpart of three in a long paper in which we consider stochastic interpolation for the Wilkie asset model, considering both Brownian bridges and Ornstein–Uhlenbeck (OU) bridges. In Part 3A, we developed certain properties for both these types of stochastic bridge, and we investigate the properties of many of our data series on the same lines. We have several economic or investment series, which all have their own peculiarities. In this paper, we cover only retail prices and wages. The other series are dealt with in Part 3C. We find that, although the annual series for the rate of inflation is generated by an AR(1) model, which is the discrete time equivalent of an OU process, an OU bridge is not suitable. We need to use a Brownian bridge on the logarithm of the Price Index. Further, the standard deviation of the monthly increments in any year is, as we find empirically from the data, a function of the change in the annual value, and further there is correlation between the monthly increments in successive years.

Suggested Citation

  • Wilkie, A. D. & Åžahin, Åžule, 2017. "Yet more on a stochastic economic model: Part 3B: stochastic bridging for retail prices and wages," Annals of Actuarial Science, Cambridge University Press, vol. 11(1), pages 100-127, March.
    • Handle: RePEc:cup:anacsi:v:11:y:2017:i:01:p:100-127_00
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    Cited by:

    1. Wen Chen & Nicolas Langren'e, 2020. "Deep neural network for optimal retirement consumption in defined contribution pension system," Papers 2007.09911, arXiv.org, revised Jul 2020.
    2. c{S}ule c{S}ahin & Shaun Levitan, 2019. "A Stochastic Investment Model for Actuarial Use in South Africa," Papers 1912.12113, arXiv.org, revised Jan 2021.
    3. Wen Chen & Nicolas Langrené, 2020. "Deep neural network for optimal retirement consumption in defined contribution pension system [Réseau de neurones profond pour consommation à la retraite optimale en système de retraite à cotisatio," Working Papers hal-02909818, HAL.

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