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International Studies in Phenomenology and Philosophy

Book | Chapter

178548

Monte carlo simulation using excel

case study in financial forecasting

Seifedine Kadry

pp. 263-289

Abstract

Modeling is the process of producing a model; a model is a representation of the construction and working of some system of interest. A model is similar to but simpler than the system it represents. One purpose of a model is to enable the analyst to predict the effect of changes to the system. On the one hand, a model should be a close approximation to the real system and incorporate most of its salient features. On the other hand, it should not be so complex that it is impossible to understand and experiment with it. A good model is a judicious tradeoff between realism and simplicity. Simulation practitioners recommend increasing the complexity of a model iteratively. An important issue in modeling is model validity. Model validation techniques include simulating the model under known input conditions and comparing model output with system output. Generally, a model intended for a simulation study is a mathematical model developed with the help of simulation software. Mathematical model classifications include deterministic (input and output variables are fixed values) or stochastic (at least one of the input or output variables is probabilistic) and static (time is not taken into account) or dynamic (time-varying interactions among variables are taken into account). Typically, simulation models are stochastic and dynamic.

Publication details

Published in:

D Strang Kenneth (2015) The Palgrave handbook of research design in business and management. Dordrecht, Springer.

Pages: 263-289

DOI: 10.1057/9781137484956_16

Full citation:

Kadry Seifedine (2015) „Monte carlo simulation using excel: case study in financial forecasting“, In: K. D Strang (ed.), The Palgrave handbook of research design in business and management, Dordrecht, Springer, 263–289.