Multiscale stochastic optimization: modeling aspects and scenario generation

Real-world multistage stochastic optimization problems are often characterized by the fact that the decision maker may take actions only at specific points in time, even if relevant data can be observed much more frequently. In such a case there are not only multiple decision stages present but also several observation periods between consecutive decisions, where profits/costs occur contingent on the stochastic evolution of some uncertainty factors. We refer to such multistage decision problems with encapsulated multiperiod random costs, as multiscale stochastic optimization problems. In this article, we present a tailor-made modeling framework for such problems, which allows for a computational solution. We first establish new results related to the generation of scenario lattices and then incorporate the multiscale feature by leveraging the theory of stochastic bridge processes. All necessary ingredients to our proposed modeling framework are elaborated explicitly for various popular examples, including both diffusion and jump models.© The Author(s) 201

Incorporating statistical model error into the calculation of acceptability prices of contingent claims

The determination of acceptability prices of contingent claims requires the choice of a stochastic model for the underlying asset price dynamics. Given this model, optimal bid and ask prices can be found by stochastic optimization. However, the model for the underlying asset price process is typically based on data and found by a statistical estimation procedure. We define a confidence set of possible estimated models by a nonparametric neighborhood of a baseline model. This neighborhood serves as ambiguity set for a multistage stochastic optimization problem under model uncertainty. We obtain distributionally robust solutions of the acceptability pricing problem and derive the dual problem formulation. Moreover, we prove a general large deviations result for the nested distance, which allows to relate the bid and ask prices under model ambiguity to the quality of the observed data.© The Author(s) 201