A guide to Monte Carlo simulation concepts for assessment of risk-return profiles for regulatory purposes (Q2219611)

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.