Markets are only fair with mass transparency at low to no cost on price data

Markets require mass transparency to get even a few people to have a dialogue on substance based on numbers.  This requires a population of millions to generate a substantive discussion by even a few people.

Derivatives data that is hidden behind expensive firewalls means the derivatives market is not transparent.  This means the prices are not fair.  The gap from fairness can reach extremes and then there is a crisis.

 

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SLV RS-DMRP Comparison Graph one year yield Dec 2000

SLV RS-DMRP Comparison Graph  one year yield Dec 2000.  This is a repeat of earlier graph but is given here for completeness with others.  Click on graph to see clearer version with distinct writing.

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 SLV RS-DMRP Comparison Graph  one year yield Dec 2000

SLV RS-DMRP Comparison Graph one year yield Dec 2000

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SLV RS-DMRP Comparison Graph 20 year minus one year yield Dec 2000

SLV RS-DMRP Comparison Graph 20 year minus one year yield Dec 2000.  Click on graph to see clearer version with distinct writing.

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 SLV RS-DMRP Comparison Graph 20 year minus one year yield Dec 2000

SLV RS-DMRP Comparison Graph 20 year minus one year yield Dec 2000

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SLV RS-DMRP Comparison Graph 20 year yield Dec 2000

The Academy of Actuaries SLV model and Regime Switching DMRP are compared starting from December 2000.  Click on graph to see clearer version with more distinct writing.

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SLV v RSDMRP 20 year yield start Dec 2000

SLV v RSDMRP 20 year yield start Dec 2000

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SLV v RSDMRP 20 year yield start Dec 2000

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2011 Valuation Actuary Symposium Faye Albert Mark Tenney Economic Scenario Generators

Faye Albert and Mark Tenney presentation on Economic Scenario Generators at 2011 Valuation Actuary Symposium.

www.soa.org/files/pd/2011-orlando-valact-57.pdf

The graphs are hard to read, so you may want to buy the e-book version, which has clear copies of the graphs.

e-book vendor 1.

e-book vendor 2

After seeing the graphs showing that SLV does poorly at low rates or transitions from medium to low or low to medium, the actuaries at the session gave Faye Albert and I low ratings for our talk.   They said we had little knowledge and should not be invited back to speak again in our speaker evaluations.  They said our talk had no important content including these graphs showing SLV fails.  SLV is the required model by the NAIC.

Since that talk in September 2011, nothing has been done to fix these problems in the SLV model.  I have downloaded the latest version of the spreadsheet and ran it.  These problems are model problems not programming problems.

Also, when the interest rate portion of the Academy of Actuaries spreadsheet and stock parts were combined, errors were introduced.  I built a replicating system and found some programming errors leading to output errors.  No one else reported them.  Those were fixed in the spreadsheet.  Steve Strommen is the person who coded in the fixes to the Academy of Actuaries spreadsheet.  Note these are distinct from the model problems that still persist in SLV.

So out of the entire US life insurance industry that is required to use the scenarios from the Academy of Actuaries spreadsheet, no one built a replicating system to test the spreadsheet.  Thus no one found the errors introduced at the time of combining the interest rate and equity parts.  Fortunately, I did, and the errors were fixed soon after the combination.   Whether companies bothered to download the fixed version and use it is hard to say. Sometimes people use old versions because they get used to them.

How to get the message out?

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SLV v RS-DMRP December 2000 5th 95th Percentiles

We show a comparison of the SLV v RS-DMRP December 2000 5th 95th Percentiles.  Click on graph to see enlarged clearer version where writing is distinct.

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Comparison of SLV to RS-DMRP for December 2000 Start Date US Treasury 5th 95th percentile

Comparison of SLV to RS-DMRP for December 2000 Start Date US Treasury 5th 95th percentile

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Comparison of SLV to RS-DMRP for December 2000 Start Date US Treasury 5th 95th percentile

One notes the SLV model as calibrated does not deal well with the zero interest rate bound monetary policy, i.e. keeping the short term rate close to zero.

Posted in Academy of Actuaries SLV Model, Ben Bernanke, Mark Tenney Interest Rate Model, Regime Switching DMRP, RS-DMRP, Stochastic Log Volatility Model, Zero Rate Policy | Leave a comment

RSESG Hello World

RSESG (TM) stands for Regime Switching Economic Scenario Generator.   Information relating to the Regime Switching DMRP Economic Scenario Generator is provided here.  Other topics including applications are covered.

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