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st: Monte Carlo Simulation w/ Pareto Dist. on Tails


From   grosegre@msu.edu
To   statalist@hsphsun2.harvard.edu
Subject   st: Monte Carlo Simulation w/ Pareto Dist. on Tails
Date   Sun, 06 Jun 2010 14:42:36 -0400

Dear Statalist:

As a novice user of Stata, I am attempting to construct a Monte Carlo simulation modeling a Home Price Index, while correcting for in-frequent and extreme index returns and an AR(3) process.

A previous Monte Carlo simulation was developed in excel: with the E(x) and std. dev based upon historical numbers; random returns and errors define by a Normal Prob. Distribution; and including an AR(3) process in returns. However, it failed to adequately simulate the index, which may be due to failing to account for the tail gain/losses greater then assumed with a normal prob. distribution. To adjust based on extreme-value theory, I would like to adjust by modeling the tail returns, past the 3rd std. dev., with a Generalized Pareto Distribution. Also, I would like to return the mean and std. dev. of the returns and, provided negative index returns, am average count and distribution of losses.

Any insights into or resources for the correct stata programing commands? I appreciate the guidance!

Greg

Gregory R. Grose
Michigan State University
Undergraduate; Finance and Economics
grosegre@msu.edu



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