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Several Sets of Assumptions for the Monte Carlo Simulation for a More Precise Analysis of Enterprise Risk

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  • Kaczmarzyk Jan

    (University of Economics in Katowice, Katowice, Poland)

Abstract

The traditional methods of risk quantification include a sensitivity analysis, a scenario analysis and a historical simulation. The true nature of risk factors changes is ignored in the traditional ‘ceteris paribus’ approach to a sensitivity analysis, hence it can be reflected in a scenario analysis and a historical simulation. The most significant disadvantage of a scenario analysis is the limited number of scenarios, whereas a historical simulation depends on historical data availability and adequacy. The Monte Carlo simulation is a clear answer to the limitations of traditional methods. The changes of risk factors reflected in the Monte Carlo simulation are simultaneous, non-linear and interdependent. The most important aspect of this method is the stage of taking up the assumptions. The purpose of the paper is to indicate that considering several reasonable sets of assumptions for the Monte Carlo simulation simultaneously can bring even more comprehensive information about enterprise risk.

Suggested Citation

  • Kaczmarzyk Jan, 2019. "Several Sets of Assumptions for the Monte Carlo Simulation for a More Precise Analysis of Enterprise Risk," Econometrics. Advances in Applied Data Analysis, Sciendo, vol. 23(4), pages 80-95, December.
    • Handle: RePEc:vrs:eaiada:v:23:y:2019:i:4:p:80-95:n:6
    DOI: 10.15611/eada.2019.4.06
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    References listed on IDEAS

    as
    1. Daniel MANATE & Pavel FARCAS, 2010. "Model for Use of Monte Carlo Simulations in Business Valuation," The Valuation Journal, The National Association of Authorized Romanian Valuers, vol. 5(1), pages 110-131.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    More about this item

    Keywords

    corporate finance; risk analysis; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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