A stochastic investment model for actuarial use in South Africa

Abstract

In this paper, we propose a stochastic investment model for actuarial use in South Africa by modelling price inflation rates, share dividends, long-term and short-term interest rates for the period 1960–2018 and inflation-linked bonds for the period 2000–2018. Possible bi-directional relations between the economic series have been considered, the parameters and their confidence intervals have been estimated recursively to examine their stability, and the model validation has been tested. The model is designed to provide long-term forecasts that should find application in long-term modelling for institutions such as pension funds and life insurance companies in South Africa

Keywords: Stochastic investment models; price inflation; share dividend yields; share dividends; share prices; long-term interest rates; short-term interest rates; inflation-linked bonds; South Africa