A guide to Monte Carlo simulation concepts for assessment of risk-return profiles for regulatory purposes
The study originates from modeling and calculation issues related to the implementation of regulatory initiatives, which require product providers to assess and disclose the risk-return profile of their products. In the paper a simulation-based calculation approach is deepened. In order to make the study carried out clearer and more concrete, the authors apply their methodologies to the chance-risk-classification of state subsidized German pension products performed by Produkt-Informationsstelle Altersvorsorge (PIA). After presenting an overview of model-based simulation, the authors investigate the approximation methods currently required by the PRIIP (packaged retail and insurance-based investment products) regulation to assess the risk-return profiles of financial products. The study demonstrates that incontrovertible empirical evidence pushes to adopt a well-specified model-based Monte Carlo simulation concept as a highly suitable tool for risk assessment, particularly in the case of pension products.
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