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)
| Identifer | oai:union.ndltd.org:VIENNA/oai:epub.wu-wien.ac.at:4131 |
| Date | 09 1900 |
| Creators | Geyer, Alois, Hanke, Michael, Weissensteiner, Alex |
| Publisher | Elsevier |
| Source Sets | Wirtschaftsuniversität Wien |
| Language | English |
| Detected Language | English |
| Type | Article, PeerReviewed |
| Format | application/pdf |
| Relation | http://dx.doi.org/10.1016/j.orl.2013.06.003, http://www.elsevier.com, http://epub.wu.ac.at/4131/ |
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