Quotation Geyer, Alois, Hanke, Michael, Weissensteiner, Alex. 2013. Scenario Tree Generation and Multi-Asset Financial Optimization Problems. Operations Research Letters 41 (5): 494-498.




We compare two popular scenario tree generation methods in the context of financial optimization: Moment matching and scenario reduction. Using a simple problem with a known analytic solution, moment matching - when ensuring absence of arbitrage - replicates this solution precisely. On the other hand, even if the scenario trees generated by scenario reduction are arbitrage-free, the solutions are biased and highly variable. These results hold for correlated and uncorrelated asset returns, as well as for normal and non-normal returns.


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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Operations Research Letters
Citation Index SCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, INF-A, STRAT-B, WH-B
Language English
Title Scenario Tree Generation and Multi-Asset Financial Optimization Problems
Volume 41
Number 5
Year 2013
Page from 494
Page to 498
Reviewed? Y
URL http://dx.doi.org/10.1016/j.orl.2013.06.003


Arbitrage-free scenario trees for financial optimization
Geyer, Alois (Details)
Hanke, Michael (University of Liechtenstein, Institute for Financial Services, 9490 Vaduz, Liechtenstein)
Weissensteiner, Alex (Technical University of Denmark, Dept. of Management Engineering, Denmark)
Institute for Financial Research IN (Details)
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