Michael Sherris
Abstract
Though actuaries have developed several types of stochastic investment models for inflation, stock market returns, and interest rates, there are two commonly used in practice: autoregressive time series models with normally distributed errors, and autoregressive conditional heteroscedasticity (ARCH) models. ARCH models are particularly suited when there is heteroscedasticity in inflation and interest rate series. In such cases nonnormal residuals are found in the empirical data. This paper examines whether Australian univariate inflation and interest rate data are consistent with autoregressive time series and ARCH model assumptions.
Key words and phrases: stochastic investment models, heteroscedasticity, unit roots, ARCH, inflation, interest rates
Michael Sherris