Building ALM models is a little like being a cartographer; we try to map the (financial) terrain a traveler needs to cross in order to get from point A to B in as much detail as possible. Depending on the desired goal and one’s familiarity with the terrain, trying to get from A to B can get you into serious trouble when not equipped with a proper map.
In this article we will explore some of the most common pitfalls observed when modelling forward projected scenarios for investment portfolios. More specifically, we will look how including observed market characteristics such as volatility clustering and jumps into scenarios for personal asset liability management, improves the advice given to clients.