An algorithm for sequential tail value at risk for path-independent payoffs in a binomial tree

Berend Roorda ()

Annals of Operations Research, 2010, vol. 181, issue 1, 463-483

Abstract: We present an algorithm that determines Sequential Tail Value at Risk (STVaR) for path-independent payoffs in a binomial tree. STVaR is a dynamic version of Tail-Value-at-Risk (TVaR) characterized by the property that risk levels at any moment must be in the range of risk levels later on. The algorithm consists of a finite sequence of backward recursions that is guaranteed to arrive at the solution of the corresponding dynamic optimization problem. The algorithm makes concrete how STVaR differs from TVaR over the remaining horizon, and from recursive TVaR, which amounts to Dynamic Programming. Algorithmic aspects are compared with the cutting-plane method. Time consistency and comonotonicity properties are illustrated by applying the algorithm on elementary examples. Copyright The Author(s) 2010

Keywords: Value at risk; Tail value at risk; Dynamic risk measures; Time consistency; Dynamic programming; Path dependency; Cutting plane method (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/s10479-010-0761-7

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