Knowledge‐based scenario tree generation methods and application in multiperiod portfolio selection problem

Zhiping Chen and Daobao Xu

Applied Stochastic Models in Business and Industry, 2014, vol. 30, issue 3, 240-257

Abstract: A scenario tree is an efficient way to represent a stochastic data process in decision problems under uncertainty. This paper addresses how to efficiently generate appropriate scenario trees. A knowledge‐based scenario tree generation method is proposed; the new method is further improved by accounting for subjective judgements or expectations about the random future. Compared with existing approaches, complicated mathematical models and time‐consuming estimation, simulation and optimization problem solution are avoided in our knowledge‐based algorithms, and large‐scale scenario trees can be quickly generated. To show the advantages of the new algorithms, a multiperiod portfolio selection problem is considered, and a dynamic risk measure is adopted to control the intermediate risk, which is superior to the single‐period risk measure used in the existing literature. A series of numerical experiments are carried out by using real trading data from the Shanghai stock market. The results show that the scenarios generated by our algorithms can properly represent the underlying distribution; our algorithms have high performance, say, a scenario tree with up to 10,000 scenarios can be generated in less than a half minute. The applications in the multiperiod portfolio management problem demonstrate that our scenario tree generation methods are stable, and the optimal trading strategies obtained with the generated scenario tree are reasonable, efficient and robust. Copyright © 2013 John Wiley & Sons, Ltd.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1002/asmb.1970

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmbi:v:30:y:2014:i:3:p:240-257

Access Statistics for this article

More articles in Applied Stochastic Models in Business and Industry from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().