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A Time Series Model for Three Asset Classes used in Financial Simulator

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  • Andrey Sarantsev
  • Angel Piotrowski
  • Ian Anderson

Abstract

We create a dynamic stochastic general equilibrium model for annual returns of three asset classes: the USA Standard & Poor (S&P) stock index, the international stock index, and the USA Bank of America investment-grade corporate bond index. Using this, we made an online financial app simulating wealth process. This includes options for regular withdrawals and contributions. Four factors are: S&P volatility and earnings, corporate BAA rate, and long-short Treasury bond spread. Our valuation measure is an improvement of Shiller's cyclically adjusted price-earnings ratio. We use classic linear regression models, and make residuals white noise by dividing by annual volatility. We use multivariate kernel density estimation for residuals. We state and prove long-term stability results.

Suggested Citation

  • Andrey Sarantsev & Angel Piotrowski & Ian Anderson, 2025. "A Time Series Model for Three Asset Classes used in Financial Simulator," Papers 2508.06010, arXiv.org.
    • Handle: RePEc:arx:papers:2508.06010
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    References listed on IDEAS

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    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Sarantsev Andrey, 2025. "A new stock market valuation measure with application to retriement planning," Statistics & Risk Modeling, De Gruyter, vol. 42(1-2), pages 1-18.
    3. Andrey Sarantsev, 2019. "A New Stock Market Valuation Measure with Applications to Retirement Planning," Papers 1905.04603, arXiv.org, revised Mar 2025.
    4. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
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