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Scenario Tree Generation and Multi-Asset Financial Optimization Problems

Geyer, Alois and Hanke, Michael and Weissensteiner, Alex (2013) Scenario Tree Generation and Multi-Asset Financial Optimization Problems. Operations Research Letters, 41 (5). pp. 494-498. ISSN 0167-6377

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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, we find that moment matching - accompanied by a check to ensure absence of arbitrage opportunities - replicates this solution precisely. On the other hand, even if the scenario trees generated by scenario reduction are arbitrage-free, the solutions to the approximate optimization problem represented by the reduced tree are biased and highly variable. These results hold for correlated and uncorrelated asset returns, as well as for normal and non-normal returns. (authors' abstract)

Item Type: Article
Additional Information: To see the final version of this paper please visit the publisher's website. Access to the published version may require a subscription. The original publication is available at www.elsevier.com.
Keywords: Scenario trees / No-arbitrage / Financial optimization / Moment matching / Scenario reduction
Divisions: Departments > Finance, Accounting and Statistics > Financial Research
Version of the Document: Accepted for Publication
Variance from Published Version: Minor
Depositing User: ePub Administrator
Date Deposited: 24 Apr 2014 12:49
Last Modified: 23 Apr 2015 15:12
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/63161/
URI: http://epub.wu.ac.at/id/eprint/4131

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