Scenario tree generation for multiperiod financial optimization by optimal discretization |
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Authors: | G.Ch. Pflug |
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Affiliation: | (1) Department of Statistics and Decision Support Systems, University of Vienna, Universitaetsstrasse 5, A-1090 Vienna, Austria, AT |
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Abstract: | Multiperiod financial optimization is usually based on a stochastic model for the possible market situations. There is a rich literature about modeling and estimation of continuous-state financial processes, but little attention has been paid how to approximate such a process by a discrete-state scenario process and how to measure the pertaining approximation error.?In this paper we show how a scenario tree may be constructed in an optimal manner on the basis of a simulation model of the underlying financial process by using a stochastic approximation technique. Consistency relations for the tree may also be taken into account. Received: December 15, 1998 / Accepted: October 1, 2000?Published online December 15, 2000 |
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Keywords: | Mathematics Subject Classification (1991): 90C15 |
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