Scenario Tree Generation and Multi-Asset Financial Optimization Problems

Alois Geyer, Michael Hanke, Alex Weissensteiner

Publication: Scientific journalJournal articleResearchpeer-review

10 Citations (Scopus)

Abstract

We compare two popular scenario tree generation methods in the context of financial optimization: Moment matching and scenario reduction. Using a simple problem with a known analytic solution, moment matching - when ensuring absence of arbitrage - replicates this solution precisely. On the other hand, even if the scenario trees generated by scenario reduction are arbitrage-free, the solutions are biased and highly variable. These results hold for correlated and uncorrelated asset returns, as well as for normal and non-normal returns.
Original languageEnglish
Pages (from-to)494 - 498
JournalOperations Research Letters
Volume41
Issue number5
DOIs
Publication statusPublished - 1 Oct 2013

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