Question

Why is it necessary to model interest stochastically?

Answer 1

A stochastic investment model tries to forecast how returns and prices on different assets or asset classes, (e. g. equities or bonds) vary over time. Stochastic models are not applied for making point estimation rather interval estimation and they use different stochastic processes.[clarification needed] Investment models can be classified into single-asset and multi-asset models. They are often used for actuarial work and financial planning to allow optimization in asset allocation or asset-liability-management (ALM).