Stochastic compounding models for continuous uniform cash flows arising in risk management

Abstract

This paper investigates the conditions under which zero unimodality is introduced into stochastic future value distributions for continuous uniform cash flows, and discusses the associated moments. The distribution of a future value generated from such cash flows is shown to be far more complicated than hitherto thought. In many situations, the statistical evidence suggesting there is potential to generate realistic future value is contradictory. These points are illustrated using a number of important areas of practical application in risk management.