Please use this identifier to cite or link to this item: http://buratest.brunel.ac.uk/handle/2438/10045
Title: An algorithm for moment-matching scenario generation with application to financial portfolio optimization
Authors: Date, P
Ponomareva, K
Roman, D
Keywords: Scenarios;Banking;Finance;Stochastic programming
Issue Date: 2015
Publisher: Elsevier
Citation: European Journal of Operational Research, 2015, 240 (3), pp. 678 - 687
Abstract: We present an algorithm for moment-matching scenario generation. This method produces scenarios and corresponding probability weights that match exactly the given mean, the covariance matrix, the average of the marginal skewness and the average of the marginal kurtosis of each individual component of a random vector. Optimisation is not employed in the scenario generation process and thus the method is computationally more advantageous than previous approaches. The algorithm is used for generating scenarios in a mean-CVaR portfolio optimisation model. For the chosen optimisation example, it is shown that desirable properties for a scenario generator are satisfied, including in-sample and out-of-sample stability. It is also shown that optimal solutions vary only marginally with increasing number of scenarios in this example; thus, good solutions can apparently be obtained with a relatively small number of scenarios. The proposed method can be used either on its own as a computationally inexpensive scenario generator or as a starting point for non-convex optimisation based scenario generators which aim to match all the third and the fourth order marginal moments (rather than average marginal moments).
URI: http://bura.brunel.ac.uk/handle/2438/10045
DOI: http://dx.doi.org/10.1016/j.ejor.2014.07.049
Appears in Collections:Dept of Mathematics Research Papers

Files in This Item:
File Description SizeFormat 
FullText.pdf283.61 kBAdobe PDFView/Open


Items in BURA are protected by copyright, with all rights reserved, unless otherwise indicated.