Problem-driven scenario generation: an analytical approach for stochastic programs with tail risk measure

Scenario generation is the construction of a discrete random vector to represent parameters of uncertain values in a stochastic program. Most approaches to scenario generation are distribution-driven, that is, they attempt to construct a random vector which captures well in a probabilistic sense the uncertainty. On the other hand, a problem-driven approach may be able to exploit the structure of a problem to provide a more concise representation of the uncertainty. In this paper we propose an analytic approach to problem-driven scenario generation. This approach applies to stochastic programs where a tail risk measure, such as conditional value-at-risk, is applied to a loss function. Since tail risk measures only depend on the upper tail of a distribution, standard methods of scenario generation, which typically spread their scenarios evenly across the support of the random vector, struggle to adequately represent tail risk. Our scenario generation approach works by targeting the construction of scenarios in areas of the distribution corresponding to the tails of the loss distributions. We provide conditions under which our approach is consistent with sampling, and as proof-of-concept demonstrate how our approach could be applied to two classes of problem, namely network design and portfolio selection. Numerical tests on the portfolio selection problem demonstrate that our approach yields better and more stable solutions compared to standard Monte Carlo sampling

Problem-driven scenario generation for stochastic programs

Stochastic programming concerns mathematical programming in the presence of uncertainty. In a stochastic program uncertain parameters are modeled as random vectors and one aims to minimize the expectation, or some risk measure, of a loss function. However, stochastic programs are computationally intractable when the underlying uncertain parameters are modeled by continuous random vectors. Scenario generation is the construction of a finite discrete random vector to use within a stochastic program. Scenario generation can consist of the discretization of a parametric probabilistic model, or the direct construction of a discrete distribution. There is typically a trade-off here in the number of scenarios that are used: one must use enough to represent the uncertainty faithfully but not so many that the resultant problem is computationally intractable. Standard scenario generation methods are distribution-based, that is they do not take into account the underlying problem when constructing the discrete distribution. In this thesis we promote the idea of problem-based scenario generation. By taking into account the structure of the underlying problem one may be able to represent uncertainty in a more parsimonious way. The first two papers of this thesis focus on scenario generation for problems which use a tail-risk measure, such as the conditional value-at-risk, focusing in particular on portfolio selection problems. In the final paper we present a constraint driven approach to scenario generation for simple recourse problems, a class of stochastic programs for minimizing the expected shortfall and surplus of some resources with respect to uncertain demands

Problem-driven scenario generation:an analytical approach for stochastic programs with tail risk measure

Scenario generation is the construction of a discrete random vector to represent parameters of uncertain values in a stochastic program. Most approaches to scenario generation are distribution-driven, that is, they attempt to construct a random vector which captures well in a probabilistic sense the uncertainty. On the other hand, a problem-driven approach may be able to exploit the structure of a problem to provide a more concise representation of the uncertainty. There have been only a few problem-driven approaches proposed, and these have been heuristic in nature. In this paper we propose what is, as far as we are aware, the first analytic approach to problem-driven scenario generation. This approach applies to stochastic programs with a tail risk measure, such as conditional value-at-risk. Since tail risk measures only depend on the upper tail of a distribution, standard methods of scenario generation, which typically spread there scenarios evenly across the support of the solution, struggle to adequately represent tail risk well

Projection results for the k-partition problem

The k-partition problem is an NP-hard combinatorial optimisation problem with many applications. Chopra and Rao introduced two integer programming formulations of this problem, one having both node and edge variables, and the other having only edge variables. We show that, if we take the polytopes associated with the ‘edge-only’ formulation, and project them into a suitable subspace, we obtain the polytopes associated with the ‘node-and-edge’ formulation. This result enables us to derive new valid inequalities and separation algorithms, and also to shed new light on certain SDP relaxations. Computational results are also presented

Scenario generation for single-period portfolio selection problems with tail risk measures:coping with high dimensions and integer variables

In this paper we propose a problem-driven scenario generation approach to the single-period portfolio selection problem which use tail risk measures such as conditional value-at-risk. Tail risk measures are useful for quantifying potential losses in worst cases. However, for scenario-based problems these are problematic: because the value of a tail risk measure only depends on a small subset of the support of the distribution of asset returns, traditional scenario based methods, which spread scenarios evenly across the whole support of the distribution, yield very unstable solutions unless we use a very large number of scenarios. The proposed approach works by prioritizing the construction of scenarios in the areas of a probability distribution which correspond to the tail losses of feasible portfolios. The proposed approach can be applied to difficult instances of the portfolio selection problem characterized by high-dimensions, non-elliptical distributions of asset returns, and the presence of integer variables. It is also observed that the methodology works better as the feasible set of portfolios becomes more constrained. Based on this fact, a heuristic algorithm based on the sample average approximation method is proposed. This algorithm works by adding artificial constraints to the problem which are gradually tightened, allowing one to telescope onto high quality solutions

A two-level graph partitioning problem arising in mobile wireless communications

In the k-partition problem (k-PP), one is given an edge-weighted undirected graph, and one must partition the node set into at most k subsets, in order to minimise (or maximise) the total weight of the edges that have their end-nodes in the same cluster. Various hierarchical variants of this problem have been studied in the context of data mining. We consider a 'two-level' variant that arises in mobile wireless communications. We show that an exact algorithm based on intelligent preprocessing, cutting planes and symmetry-breaking is capable of solving small- and medium-size instances to proven optimality, and providing strong lower bounds for larger instances