Volatility Calibration Sensitivity
Monte Carlo projections are highly sensitive to the choice of calibration peer group. The following table compares results under four different volatility assumptions, all starting at L=48.
| Calibration Group | Sigma | Drift | P(L<30 | 5yr) | P(L>55 | 5yr) | Median 5yr | Median 10yr |
|---|---|---|---|---|---|---|
| OECD Democracies | 3.78 | +0.571 | 0.6% | 12.9% | 50.4 | 53.2 |
| All Democracies (L>70) | 3.50 | +0.523 | 0.5% | 10.9% | 50.2 | 52.8 |
| Declining Democracies (-10pt) | 3.05 | +0.131 | 0.4% | 5.2% | 48.3 | 48.9 |
| Turkey/Venezuela/Hungary * | 3.42 | -0.207 | 1.5% | 4.6% | 46.6 | 45.5 |
* Highlighted row indicates the calibration used in the main probability cone above.
Interpretation: Volatility (sigma) is comparable across peer groups (OECD: 3.78, Turkey/Ven./Hungary: 3.42). The critical difference is drift: OECD democracies average +0.57 pts/yr (slight upward tendency) vs. -0.21 pts/yr for Turkey/Venezuela/Hungary (negative drift embeds a declining trajectory assumption). Under OECD calibration, P(L<30 within 5 years) = 0.6% and the median 10-year outcome is L=53 (vs. L=45 under thesis calibration). The choice of calibration peer group -- particularly its drift parameter -- is the single largest driver of projection differences. Readers should evaluate which peer group best represents the US trajectory.