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Apr 2016 Q1iii

Discussion in 'SP9' started by ALEX_AK, Jul 23, 2019.

  1. ALEX_AK

    ALEX_AK Member

    Hello,

    May I know if there is any example on how the nested stochastic model can be used?
    Under a stochastic model, the inputs/outputs are in the form of distribution. So the input parameters could be in the form of a distribution.
    How does a nested stochastic model work? Distribution in a distribution?
     
    ALEX_AK, Jul 23, 2019
    #1
  2. Anna Bishop

    Anna Bishop ActEd Tutor Staff Member

    Hello Alex!

    An example of a nested stochastic model for the mobile phone insurer in the question could be a 'frequency-severity' model:

    Model the number of claims per annum, N, as a stochastic variable, eg with a Poisson(lambda) distribution.

    Within each simulation of the number of claims, model the claim amounts: X1, ..., XN as stochastic random variables, eg with logN(mu, sigma^2) distributions.

    This is like the compound distribution model from CT3/CT6 for modelling the total claim amount, S:

    S = X1+ ... + XN.

    Keep up the good work!
    Anna
     
    Anna Bishop, Jul 23, 2019
    #2
    ALEX_AK likes this.
  3. ALEX_AK

    ALEX_AK Member

    Thanks a lot for the clear explanation.
     
    ALEX_AK, Jul 24, 2019
    #3
    Anna Bishop likes this.

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