Efficient Nested Simulation Experiment Design via the Likelihood Ratio Method

Ben Mingbin Feng () and Eunhye Song ()
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Ben Mingbin Feng: Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada
Eunhye Song: H. Milton Stewart School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, Georgia 30332

INFORMS Journal on Computing, 2025, vol. 37, issue 3, 723-742

Abstract: In the nested simulation literature, a common assumption is that the experimenter can choose the number of outer scenarios to sample. This paper considers the case when the experimenter is given a fixed set of outer scenarios from an external entity. We propose a nested simulation experiment design that pools inner replications from one scenario to estimate another scenario’s conditional mean via the likelihood ratio method. Given the outer scenarios, we decide how many inner replications to run at each outer scenario as well as how to pool the inner replications by solving a bilevel optimization problem that minimizes the total simulation effort. We provide asymptotic analyses on the convergence rates of the performance measure estimators computed from the optimized experiment design. Under some assumptions, the optimized design achieves O ( Γ − 1 ) mean squared error of the estimators given simulation budget Γ . Numerical experiments demonstrate that our design outperforms a state-of-the-art design that pools replications via regression.

Keywords: nested simulation; design of experiment; likelihood ratio method; enterprise risk management; uncertainty quantification (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:orijoc:v:37:y:2025:i:3:p:723-742

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