The Problems with Monte Carlo Simulation

Nawrocki, David
November 2001
Journal of Financial Planning;Nov2001, Vol. 14 Issue 11, p92
Academic Journal
Monte Carlo simulation has enjoyed a resurgence in financial literature in recent years.This paper explores the reasons why implementing Monte Carlo simulation is very difficult at best and can lead to incorrect decisions at worst.The problem is that the typical assumption set used in Monte Carlo simulation assumes normal distributions and correlation coefficients of zero, neither of which are typical in the world of financial markets. It is important for planners to realize that these assumptions can lead to problems with their analysis. Financial planners will find that exploratory simulation provides equivalent or better answers and is simpler to implement without assumptions. INSET: Monte Carlo Simulation: Challenging The Sacred Cow.


Related Articles

  • Parametric and Nonparametric Population Methods. Proost, Johannes H.; Eleveld, Douglas J. // Clinical Pharmacokinetics;2006, Vol. 45 Issue 8, p851 

    The article presents the authors' comment on the research entitled "Parametric and Nonparametric Population Methods: Their Comparative Performance in Analysing a Clinical Dataset and Two Monte Carlo Simulation Studies." They claim that the performance of the parametric iterative two-stage...

  • ON THE CONVEX HULL OF m POINTS UNIFORMALY DISTRIBUTED IN A TRIANGLE. Ştefănescu, Ştefan V. // Bulletin of the Transilvania University of Brasov, Series III: M;2008, Vol. 1 Issue 50, p375 

    We proposed a probabilistic approach to compute the average number of the vertices for the convex hull CH determined by m uniform random points Pi belonging to a triangle T ⊂ R2. The theoretical results were confirmed practically by applying a Monte Carlo simulation technique. The Monte...

  • Multiple “time step” Monte Carlo simulations: Application to charged systems with Ewald summation. Bernacki, Katarzyna; Hetényi, Balázs; Berne, B. J. // Journal of Chemical Physics;7/1/2004, Vol. 121 Issue 1, p44 

    Recently, we have proposed an efficient scheme for Monte Carlo simulations, the multiple “time step” Monte Carlo (MTS-MC) [J. Chem. Phys. 117, 8203 (2002)] based on the separation of the potential interactions into two additive parts. In this paper, the structural and thermodynamic...

  • Simulation and theory of self-assembly and network formation in reversibly cross-linked equilibrium polymers. Kindt, James T. // Journal of Chemical Physics;10/8/2005, Vol. 123 Issue 14, p144901 

    A simulation model of hard spheres capable of reversible assembly into chains, which then may reversibly cross-link into networks, has been studied through grand canonical Monte Carlo simulation. Effects of varying intra- and interchain bond strengths, chain flexibilities, and restrictions on...

  • Microscopic structure and thermodynamics of a core-softened model fluid: Insights from grand canonical Monte Carlo simulations and integral equations theory. Pizio, Orest; Dominguez, Hector; Duda, Yurko; Sokołowski, Stefan // Journal of Chemical Physics;5/7/2009, Vol. 130 Issue 17, p174504 

    We have studied the microscopic structure and thermodynamic properties of isotropic three-dimensional core-softened model fluid by using extensive grand canonical Monte Carlo computer simulations and Ornstein–Zernike integral equations with hypernetted chain and Rogers–Young...

  • Progress in Complex 2D and 3D Cohesive Fracture Modelling Considering Random Heterogeneity. Zhenjun Yang; Xiangting Su; Jianfei Chen; Guohua Liu // AIP Conference Proceedings;5/21/2010, Vol. 1233 Issue 1, p638 

    This paper summarises our recent efforts on finite element modelling of complex 2D and 3D fracture in quasi-brittle materials considering random heterogeneous fracture properties, using a simple yet effective method developed in associated with Abaqus. In this method, potential cracks are...

  • Tests of Random Walk: A Comparison of Bootstrap Approaches. Lima, Eduardo J. A.; Tabak, Benjamin M. // Computational Economics;Nov2009, Vol. 34 Issue 4, p365 

    This paper compares different versions of the multiple variance ratio test based on bootstrap techniques for the construction of empirical distributions. It also analyzes the crucial issue of selecting optimal block sizes when block bootstrap procedures are used. The comparison of the different...

  • Sonar detection range index estimation approach in uncertain environments. Li, Fan; Guo, Sheng-ming; Chen, Yao-ming // AIP Conference Proceedings;9/6/2010, Vol. 1272 Issue 1, p375 

    The traditional detection range index prediction of sonar systems assumes a deterministic environment and causes overestimation of the detection range index. The realistic ocean environment consists of a quantitative measure of environmental uncertainty such as sound speed profile, sea depth and...

  • Initial Data Truncation for Univariate Output of Discrete-event Simulations Using the Kalman Filter. Gallagher, Mark A.; Bauer Jr., Kenneth W. // Management Science;Apr96, Vol. 42 Issue 4, p559 

    Data truncation is a commonly accepted method of dealing with initialization bias in discrete-event simulation. An algorithm for determining the appropriate initial-data truncation point for univariate output is proposed. The technique entails averaging across independent replications and...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics