Scenario Tree Generation and Multi-Asset Financial Optimization Problems

Alois Geyer; Michael Hanke; Alex Weissensteiner

doi:10.1016/j.orl.2013.06.003

Scenario Tree Generation and Multi-Asset Financial Optimization Problems

Alois Geyer, Michael Hanke, Alex Weissensteiner

Institute for Financial Research

Publication: Scientific journal › Journal article › peer-review

72 Downloads (Pure)

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 language	English
Pages (from-to)	494 - 498
Journal	Operations Research Letters
Volume	41
Issue number	5
DOIs	https://doi.org/10.1016/j.orl.2013.06.003
Publication status	Published - 1 Oct 2013

Access to Document

10.1016/j.orl.2013.06.003Licence: Unspecified

Scenrednum25 SSRNAccepted author manuscript, 76.6 KBLicence: Other

Check availability

University Library Catalogue

Arbitrage-free scenario trees for financial optimization
Geyer, A. (PI - Project head)
1/12/10 → 31/12/13
Project: Research funding

Cite this

@article{5fc56f6621454fbda94a0e2de38f0e44,

title = "Scenario Tree Generation and Multi-Asset Financial Optimization Problems",

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.",

author = "Alois Geyer and Michael Hanke and Alex Weissensteiner",

year = "2013",

month = oct,

day = "1",

doi = "10.1016/j.orl.2013.06.003",

language = "English",

volume = "41",

pages = "494 -- 498",

journal = "Operations Research Letters",

issn = "0167-6377",

publisher = "Elsevier B.V.",

number = "5",

}

TY - JOUR

T1 - Scenario Tree Generation and Multi-Asset Financial Optimization Problems

AU - Geyer, Alois

AU - Hanke, Michael

AU - Weissensteiner, Alex

PY - 2013/10/1

Y1 - 2013/10/1

N2 - 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.

AB - 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.

U2 - 10.1016/j.orl.2013.06.003

DO - 10.1016/j.orl.2013.06.003

M3 - Journal article

SN - 0167-6377

VL - 41

SP - 494

EP - 498

JO - Operations Research Letters

JF - Operations Research Letters

IS - 5

ER -

Scenario Tree Generation and Multi-Asset Financial Optimization Problems

Abstract

Access to Document

Check availability

Projects

Arbitrage-free scenario trees for financial optimization

Cite this