Bootstrap monte carlo

Jonathan Kandell · 2024-12-17T20:49:32Z

Pralana does not currently support bootstrapping monte carlo. I'm not sure how much I'd prioritize it, but Bootstrapping would be a nice compliment to statistical monte carlo and historical recreation. The big advantage of bootstrapping is that it generalizes the historic record rather than enforces a normal curve we know is false. The "fat tails" we find in the historic data are especially important in stress test modeling since the "worst case" (e.g. 5th percentile) happens much more frequently than shows with a normal curve. Correlations between assets also get lost in the existing monte carlo, where we are forced to either choose 100% correlated or uncorrelated. The percentile we get in Pralana's historic simulation is limited by the fact history unfolds in exactly the same order, repeated as many times as possible, with fewer and fewer samples as one gets more recent. In bootstrapping this all gets generalized: there is no bias between far back and recent, there is no assumptions of historical events like depressions and wars, inflations and depressions occuring in any particular order. You can think of bootstrapping as history generalized Ideally, users would pick the size of the block of years to use for bootstrapping "chunks" that get randomly reordered. The larger the base chunks, the closer the results comes to the historical record, but the more reversion to the mean and other aspects of actual history gets captured. The smaller the size of the chunks the more samples we get and the closer it comes to a normal curve (although still reflecting fat tails). The historical correlations between assets would also get perfectly reflected with a bootstrap without needing fancy math; in the current monte carlo correlations between assets get lost, and we're given the 'crude' hack of "perfectly correlated" or "perfectly uncorrelated." All in all, bootstrapping captures the best of both worlds, and I think would be fairly easy to implement since the bones are already there in the historical simulation. FWIW, portfolio visualizer offers bootstrapping option and it's the simulation of choice in Ben Mathew's TPAW, and much retirement research.

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TBS02748

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October 27, 2025 10:20 am

I shared this thread with my wife, who is a trained economist (Ph.D) and has written on bootstrap analysis and the less-appreciated "Jack-knife." Anyway, when I said we had to get on top of this to make our plan more robust, she said, "You need to get out more."

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