Stochastic Modeling

AAA

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.

INVESTOPEDIA EXPLAINS '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
  1. Control

    1. The use of power to influence an outcome. For example, working ...
  2. Discrete Distribution

    The statistical or probabilistic properties of observable (either ...
  3. Burning Cost Ratio

    An insurance-industry calculation of excess losses divided by ...
  4. P-Value

    The level of marginal significance within a statistical hypothesis ...
  5. Monte Carlo Simulation

    A problem solving technique used to approximate the probability ...
  6. Quantitative Analysis

    A business or financial analysis technique that seeks to understand ...
Related Articles
  1. Find The Right Fit With Probability ...
    Fundamental Analysis

    Find The Right Fit With Probability ...

  2. Top 4 Fibonacci Retracement Mistakes ...
    Forex Education

    Top 4 Fibonacci Retracement Mistakes ...

  3. Bet Smarter With The Monte Carlo Simulation
    Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

  4. Monte Carlo Simulation With GBM
    Fundamental Analysis

    Monte Carlo Simulation With GBM

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center