by Carolyn Rothwell on July 31, 2012

Monte Carlo Methods in Finance Using Fat Tail Models


Are you interested in Monte Carlo methods used in financial planning projections?  If so, this is a topic of interest you have in common with the President of Money Tree Software, Mark Snodgrass.

Mark has taken the time to share some of his knowledge of Monte Carlo simulations and the use of fat tail probability curves to help model market risks in a short informational paper: 

Monte Carlo Methods in Finance Using Fat Tail Models
By Mark Snodgrass
 

Abstract:
Random regular variation, volatility, and uncertainty are facts of everyday life. We don’t know what the weather or stock market activity will be on any given day, but most days deliver fairly common occurrences and familiar kinds of changes. Extreme and improbable events can occasionally happen as well; rivers flood, hurricanes surge, currencies topple, and markets crash. Financial professionals incorporate all the ups and downs of markets into their expectations for portfolios and financial plans. The problem lies with understanding and planning for normal market variations and also properly including an appropriate probability for rare but very extreme risks. This brief note describes some features of Monte Carlo Simulation, specifically fat tails, which offers an additional method to model market risks.

Monte Carlo in Financial Planning 

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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.