The Wilkie Model A Stochastic Asset Model

Summary
The Wilkie model was proposed by Prof. A.D Wilkie in his 1986 paper A Stochastic Investment
Model for Actuarial Use [2]. The aim of the model was to provide a relatively straightforward
stochastic model of asset returns which could be used in tackling actuarial problems. The model was
one of the first of its kind and introduced the actuarial profession to stochastic techniques which are
widely used today in determining the long term strategic allocation of assets for insurers and
pension funds.
The objective of the project is to understand the Wilkie Model and to use this understanding to
undertake an investigation of a part of the models framework, update the model in some way or to
use the model to investigate a practical problem of actuarial interest.
Pre-requisites
This project can be undertaken without any prior knowledge of the area and few pre-requisites.
Some experience with R and Excel will be useful as will any knowledge of financial mathematics (e.g.,
MATH1510, MATH2515 and MATH2525) and time series analysis (see for example the textbooks
[6],[7],[8] and [9]) and basic statistics (as covered in MATH1715 and MATH1725).
Some internet research will be required for different parts of the project and an interest in actuarial
themes and practice is desirable.
Outline of the Project
All students should carry out the following:
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Read some background material on time series (e.g. from [6], [7], [8] and [9]) and also some
sections of the papers by Wilkie et al. ([2], [3] and [4]). The book by Booth et al. [5] may also
be useful reading.
The student should then set up the model using a combination of R and Excel and use the
data provided to test the set up by repeating the parameter estimations for the period 1923
2009 as done in [4].
The student should compare the results to Wilkie et al. and use the standard error of the
parameter estimates to discuss the consistency of the results.
Once consistent estimates for the period 1923-2009 have been completed you should
extend the period in question to 2015, re-fit the model and discuss any significant changes.
This part of the project will involve searching for the correct market data for the most recent
periods available.
In practice, actuaries are influenced not only by past data, but by current market conditions
and future expectations. By examining the current UK government bond yield curve and
with reference to current economic policy you should present a brief discussion of the
suitability of the fitted parameters.

Then the student should select one of the following topics to explore further:
(A) Investigate how parameter estimates vary if different economic data is used (e.g. end
December values of indices instead of end June values). Also, investigate replacing the
assumption that model residuals are normally distributed with an alternative distribution
which has fat tails (i.e. more extreme outcomes are more likely in comparison with the
normal distribution).
(B) Outline the discussion which has taken place in the literature below regarding the use of an
autoregressive conditional heteroskedasticity ARCH model for inflation in the Wilkie
model (instead of a plain autoregressive model) and investigate whether updating to include
the most recent data would lead to any new conclusions. You could also investigate
threshold autoregressive models.
(C) In light of your discussion of the current economic environment and appropriateness of the
parameter estimates, investigate the outcomes for simple portfolio under different
economic scenarios (i.e. combinations of parameters reflecting a particular circumstance,
e.g. a booming economy, stagflation, rising interest rates etc.).
(D) Use the model to estimate the return on simple portfolios of assets which might be typical
for a UK Defined Contribution (DC) pension savings scheme (e.g. equity and government
bonds). Compare the distribution of outcomes with a particular focus on downside risk and
discuss how lifestyle investment strategies could be used. This will involve research of
what lifestyling is and how it is used in practice.

References
[1] Huber, P.P. (1997). A Review of Wilkies Stochastic Asset Model, British Actuarial Journal, 3,
pp. 181 210.
[2] Geohegan, T.J. et al (1992). Report on the Wilkie Stochastic Investment Model, Journal of the
Institute of Actuaries, 119, pp.173-228.
[2] Wilkie, A.D. (1986). A Stochastic Investment Model for Actuarial Use, Transactions of the Faculty
of Actuaries, 39, pp. 341403.
[3] Wilkie, A.D. (1995). More on a Stochastic Asset Model for Actuarial Use, British Actuarial Journal,
1, pp. 777 964.
[4] Wilkie, A.D. et al (2010). Yet More on a Stochastic Economic Model: Part 1: Updating and
Refitting, 1995 to 2009, Annals of Actuarial Science, 5, pp. 5399.
[5] Booth, P. et al (2005). Modern Actuarial Theory and Practice (Second Edition), Chapman &
Hall/CRC.
[6] Cryer, J.D. (1986). Time series analysis , Duxbury.

[7] Bowerman, B. L. and OConnell, R. T. (1993). Forecasting and time series: an applied approach,
Duxbury.
[8] Brockwell, P.J. and Davis, R.A. (2002). Introduction to time series and forecasting, Springer.
[9] Chatfield, C. (2004). The analysis of time series: an introduction, 6th Edition, Chapman and
Hall/CRC.
Important Note: Students should be aware that their final projects (or a summary of the results) will
be shared with Prof. A.D. Wilkie of InQA Limited, the provider of the data for this project. The data
provided cannot be used for any purpose other than completion of this project or shared without the
explicit permission of Prof. Wilkie.