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Simulation optimization of risk measures with adaptive risk levels

Author

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  • Helin Zhu

    (Georgia Institute of Technology)

  • Joshua Hale

    (Georgia Institute of Technology)

  • Enlu Zhou

    (Georgia Institute of Technology)

Abstract

Optimizing risk measures such as Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) of a general loss distribution is usually difficult, because (1) the loss function might lack structural properties such as convexity or differentiability since it is often generated via black-box simulation of a stochastic system; (2) evaluation of risk measures often requires rare-event simulation, which is computationally expensive. In this paper, we study the extension of the recently proposed gradient-based adaptive stochastic search to the optimization of risk measures VaR and CVaR. Instead of optimizing VaR or CVaR at the target risk level directly, we incorporate an adaptive updating scheme on the risk level, by initializing the algorithm at a small risk level and adaptively increasing it until the target risk level is achieved while the algorithm converges at the same time. This enables us to adaptively reduce the number of samples required to estimate the risk measure at each iteration, and thus improving the overall efficiency of the algorithm.

Suggested Citation

  • Helin Zhu & Joshua Hale & Enlu Zhou, 2018. "Simulation optimization of risk measures with adaptive risk levels," Journal of Global Optimization, Springer, vol. 70(4), pages 783-809, April.
  • Handle: RePEc:spr:jglopt:v:70:y:2018:i:4:d:10.1007_s10898-017-0588-8
    DOI: 10.1007/s10898-017-0588-8
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    References listed on IDEAS

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    1. Andrzej Ruszczyński & Alexander Shapiro, 2006. "Optimization of Convex Risk Functions," Mathematics of Operations Research, INFORMS, vol. 31(3), pages 433-452, August.
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    Cited by:

    1. Corlu, Canan G. & Akcay, Alp & Xie, Wei, 2020. "Stochastic simulation under input uncertainty: A Review," Operations Research Perspectives, Elsevier, vol. 7(C).
    2. Chang, Kuo-Hao & Cuckler, Robert & Lee, Song-Lin & Lee, Loo Hay, 2022. "Discrete conditional-expectation-based simulation optimization: Methodology and applications," European Journal of Operational Research, Elsevier, vol. 298(1), pages 213-228.
    3. Steffen Rebennack, 2022. "Data-driven stochastic optimization for distributional ambiguity with integrated confidence region," Journal of Global Optimization, Springer, vol. 84(2), pages 255-293, October.
    4. Wang, Tianxiang & Xu, Jie & Hu, Jian-Qiang & Chen, Chun-Hung, 2023. "Efficient estimation of a risk measure requiring two-stage simulation optimization," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1355-1365.

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