The need for stochastic modelling is on the rise globally in the pension, life insurance and investment industries due to both an increase in regulation and a natural requirement for stochastic analysis in modelling exercises. Research in the area of stochastic models for actuarial use in South Africa has largely been limited. The seminal paper in this regard is Thomson’s (1996) proposed model which has a number of practical limitations.
In this paper, we propose a stochastic investment model for South Africa by modelling price inflation rates, long term and short-term interest rates, index-linked bonds and equity returns for the period 1960-2018. Possible by-directional relations between the economic series have been considered and the model is designed to provide long-term forecasts that should find application in long-term modelling for both pension funds and life insurance companies.