Quotation Geyer, Alois, Hanke, Michael, Weissensteiner, Alex. 2011. Arbitrage-free Scenario Trees for Financial Optimization.


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Abstract

This paper presents a method which is designed to generate arbitrage-free scenario trees representing multivariate return distributions. Our approach is embedded in the setting of arbitrage pricing theory (APT), and asset returns are assumed to be driven by orthogonal factors. We derive no-arbitrage bounds for the least possible number of scenarios (i.e. the smallest dimension of the discrete state-space) necessary to match the first two moments and to exclude arbitrage at the outset. This not only safeguards against the curse of dimensionality: Numerical results from solving two-stage asset allocation problems show that highly accurate results can be obtained with the smallest possible scenario tree.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Working/discussion paper, preprint
Language English
Title Arbitrage-free Scenario Trees for Financial Optimization
Year 2011
URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1927222

Associations

Projects
Arbitrage-free scenario trees for financial optimization
People
Geyer, Alois (Details)
Hanke, Michael (Former researcher)
External
Weissensteiner, Alex (Free University of Bolzano/Bozen, Italy)
Organization
Institute for Financial Research IN (Details)
Competence Center for Empirical Research Methods WE (Details)
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