by ELEANOR LAISE Wall Street Journal May 2, 2009
But there is little chance your Monte Carlo simulation, named for the gambling mecca, would have highlighted a scenario like the market slide just seen. Though these tools typically run a portfolio through hundreds or thousands of potential market scenarios, they often assign minuscule odds to extreme market events. Yet these extreme events seem to be happening more often.
Some industry participants and academics are pushing to improve the Monte Carlo tools' ability to highlight the risk of major market slides.
My comment: the standard deviation of daily stock market returns varies drastically over time, by perhaps a factor of 8 -- annualized volatility of daily returns has ranged from 10% to 80% (experienced in October and November 2008), as is reflected by the VIX index. To be more realistic, Monte Carlo simulations should incorporate "stochastic volatility".