Modeling partial Greeks of variable annuities with dependence

Dynamic hedging used to mitigate the financial risks associated with large portfolios of variable annuities requires calculating partial dollar deltas on major market indices. Metamodeling approaches have been proposed in the past few years to address the computational issues related to the calculation of partial dollar deltas. In this paper, we investigate whether the additional complication of modeling the dependence between the partial dollar deltas improves the accuracy of the metamodeling approaches. We use several copulas to model the dependence structures of the partial dollar deltas and conduct numerical experiments to compare different metamodels. Despite the evidence of strong dependence in the estimated models, our numerical results show that modeling the dependence structures in the metamodels does not improve the accuracy of the estimations at the portfolio level. This is because the dependence between the partial dollar deltas is well captured by the covariates used in the marginal models. This finding suggests that we should focus more on marginal models than specifying the dependence structure explicitly.     

Simulation-based transfer function modeling for transient analysis of general queueing systems

This paper is concerned with characterizing the transient behavior of general queueing systems, which is widely known to be notoriously difficult. The objective is to develop a statistical methodology, integrated with extensive offline simulation and preliminary queueing analysis, for the estimation of a small number of transfer function models (TFMs) that quantify the input–output dynamics of a general queueing system. The input here is the time-varying arrival rate of jobs to the system; the time-dependent output performances include the departure rate of jobs and the mean of the work in process (i.e., number of jobs in the system). The resulting TFMs are difference equations, like the discrete approximations of the ordinary differential equations provided by an analytical approach, while possessing the high fidelity of simulation. Our method is expected to overcome the shortcomings of the existing transient analysis approaches, i.e., the computational burden of simulation and the lack of fidelity of analytical queueing models.     

Error estimation properties of Gaussian process models in stochastic simulations

The theoretical relationship between the prediction variance of a Gaussian process model (GPM) and its mean square prediction error is well known. This relationship has been studied for the case when deterministic simulations are used in GPM, with application to design of computer experiments and metamodeling optimization. This article analyzes the error estimation of Gaussian process models when the simulated data observations contain measurement noise. In particular, this work focuses on the correlation between the GPM prediction variance and the distribution of prediction errors over multiple experimental designs, as a function of location in the input space. The results show that the error estimation properties of a Gaussian process model using stochastic simulations are preserved when the signal-to-noise ratio in the data is larger than 10, regardless of the number of training points used in the metamodel. Also, this article concludes that the distribution of prediction errors approaches a normal distribution with a variance equal to the GPM prediction variance, even in the presence of significant bias in the GPM predictions.     

Computational optimization of the configuration of a spatially resolved spectroscopy sensor for milk analysis

A global optimizer has been developed, capable of computing the optimal configuration in a probe for spatially resolved reflectance spectroscopy (SRS). The main objective is to minimize the number of detection fibers, while maintaining an accurate estimation of both absorption and scattering profiles. Multiple fibers are necessary to robustify the estimation of optical properties against noise, which is typically present in the measured signals and influences the accuracy of the inverse estimation. The optimizer is based on a robust metamodel-based inverse estimation of the absorption coefficient and a reduced scattering coefficient from the acquired SRS signals. A genetic algorithm is used to evaluate the effect of the fiber placement on the performance of the inverse estimator to find the bulk optical properties of raw milk. The algorithm to find the optimal fiber placement was repeatedly executed for cases with a different number of detection fibers, ranging from 3 to 30. Afterwards, the optimal designs for each considered number of fibers were compared based on their performance in separating the absorption and scattering properties, and the significance of the differences was tested. A sensor configuration with 13 detection fibers was found to be the combination with the lowest number of fibers which provided an estimation performance which was not significantly worse than the one obtained with the best design (30 detection fibers). This design resulted in the root mean squared error of prediction (RMSEP) of 1.411 cm⁻¹ (R² = 0.965) for the estimation of the bulk absorption coefficient values, and 0.382 cm⁻¹ (R² = 0.996) for the reduced scattering coefficient values.     

Continuous optimization via simulation using Golden Region search

Simulation Optimization (SO) is a class of mathematical optimization techniques in which the objective function can only be numerically evaluated through simulation. In this paper, a new SO approach called Golden Region (GR) search is developed for continuous problems. GR divides the feasible region into a number of (sub) regions and selects one region in each iteration for further search based on the quality and distribution of simulated points in the feasible region and the result of scanning the response surface through a metamodel. Monte Carlo experiments show that the GR method is efficient compared to three well-established approaches in the literature. We also prove the asymptotic convergence in probability to a global optimum for a large class of random search methods in general and GR in particular.     

A fuzzy theoretic approach to simulation metamodeling

In this paper, we explore the potential application of fuzzy linear regression in developing simulation metamodels. It should be noted that the basic construct for simulation metamodels involves uncertainties and ambiguities that may be better addressed through fuzzy linear regression application. The solution techniques employed by fuzzy linear regression are very familiar, and the generation of fuzzy outputs may offer a wide range of solution space to the decision maker, thereby reducing the risk of making an incorrect economic decision. A numerical example is presented to show how a possibility distribution is used to capture the vagueness in a dependent variable for a regression metamodel.