DEFINITION of 'Stochastic Modeling'
A method of financial modeling in which one or more variables within the model are random. Stochastic modeling is for the purpose of estimating the probability of outcomes within a forecast to predict what conditions might be like under different situations. The random variables are usually constrained by historical data, such as past market returns.
Next Up
BREAKING DOWN 'Stochastic Modeling'
The Monte Carlo Simulation is an example of a stochastic model used in finance. When used in portfolio evaluation, multiple simulations of the performance of the portfolio are done based on the probability distributions of the individual stock returns. A statistical analysis of the results can then help determine the probability that the portfolio will provide the desired performance.
RELATED TERMS

Control
1. The use of power to influence an outcome. For example, working ... 
Discrete Distribution
The statistical or probabilistic properties of observable (either ... 
Burning Cost Ratio
An insuranceindustry calculation of excess losses divided by ... 
Quantitative Analysis
A business or financial analysis technique that seeks to understand ... 
Monte Carlo Simulation
Monte Carlo simulations are used to model the probability of ... 
Risk
The chance that an investment's actual return will be different ...
Related Articles

Fundamental Analysis
Find The Right Fit With Probability Distributions
Discover a few of the most popular probability distributions and how to calculate them. 
Forex Education
Top 4 Fibonacci Retracement Mistakes To Avoid
Using Fibonacci incorrectly can have disastrous consequences. Find out which common moves to avoid. 
Active Trading Fundamentals
Bet Smarter With The Monte Carlo Simulation
This technique can reduce uncertainty in estimating future outcomes. 
Fundamental Analysis
Monte Carlo Simulation With GBM
Learn to predict future events through a series of random trials. 
Investing
3 Healthy Financial Habits for 2016
”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets. 
Investing
How to Ballast a Portfolio with Bonds
If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility. 
Economics
The Truth about Productivity
Why has labor market productivity slowed sharply around the world in recent years? One of the greatest economic mysteries out there. 
Term
How Market Segments Work
A market segment is a group of people who share similar qualities. 
Active Trading
Market Efficiency Basics
Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time. 
Fundamental Analysis
5 Basic Financial Ratios And What They Reveal
Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
RELATED FAQS

What is the difference between fast and slow stochastics in technical analysis?
The main difference between fast and slow stochastics is summed up in one word: sensitivity. The fast stochastic is more ... Read Full Answer >> 
What is finance?
"Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >> 
What is the difference between positive and normative economics?
Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >> 
Do plane tickets get cheaper closer to the date of departure?
The price of flights usually increases one month prior to the date of departure. Flights are usually cheapest between three ... Read Full Answer >> 
Is Colombia an emerging market economy?
Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >> 
What assumptions are made when conducting a ttest?
The common assumptions made when doing a ttest include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>