On page 19 of chapter 23 the notes say "a stochastic modelling exercise is carried out with an n year time horizon to assess the starting values for the traditional valuation at time n" What exactly does it mean by starting values? I thought alm was projecting cash flows so presumably it tells us how our assets could change in value, but what information does it give us about the liability start point?
Alm Hi Ali In the same way as projecting our asset cashflows, we need to project our liability cashflows too. So, this could be done stochastically too. For example, if the cashflows relate to price inflation, you may have already modelled this stochastically in your asset model, and if so you could (and should!) model it consistently for the liabilities too. So then you would get a distribution of values for the: - assets and, - liabilities at time n. Hope this helps Best wishes Stuart Underwood
