Yet more on a stochastic economic model: Part 3B: stochastic bridging for retail prices and wages

Wilkie A. D., ŞAHİN Ş.

ANNALS OF ACTUARIAL SCIENCE, vol.11, no.1, pp.100-127, 2017 (ESCI) identifier

  • Publication Type: Article / Article
  • Volume: 11 Issue: 1
  • Publication Date: 2017
  • Doi Number: 10.1017/s174849951600021x
  • Journal Indexes: Emerging Sources Citation Index (ESCI), Scopus, ABI/INFORM, EconLit
  • Page Numbers: pp.100-127
  • Hacettepe University Affiliated: Yes


This is the second subpart of three in a long paper in which we consider stochastic interpolation for the Wilkie asset model, considering both Brownian bridges and Ornstein-Uhlenbeck (OU) bridges. In Part 3A, we developed certain properties for both these types of stochastic bridge, and we investigate the properties of many of our data series on the same lines. We have several economic or investment series, which all have their own peculiarities. In this paper, we cover only retail prices and wages. The other series are dealt with in Part 3C. We find that, although the annual series for the rate of inflation is generated by an AR(1) model, which is the discrete time equivalent of an OU process, an OU bridge is not suitable. We need to use a Brownian bridge on the logarithm of the Price Index. Further, the standard deviation of the monthly increments in any year is, as we find empirically from the data, a function of the change in the annual value, and further there is correlation between the monthly increments in successive years.