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A copula-based heuristic for scenario generation

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An Erratum to this article was published on 25 October 2014

Abstract

This paper presents a new heuristic for generating scenarios for two-stage stochastic programs. The method uses copulas to describe the dependence between the marginal distributions, instead of the more common correlations. The heuristic is then tested on a simple portfolio-selection model, and compared to two other scenario-generation methods.

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Notes

  1. For some available codes, see, for example, http://www.mathfinance.cn/tags/copula.

  2. This assumes that we match all the possible pairs; more generally, we can replace \({n}^2\) by the number of matched bivariate copulas. For example, if we specify copulas only for pairs of margins \((i,j)\) with \(|i-j|\le k\), for some fixed \(k\), the heuristic becomes \({\fancyscript{O}\!\left( {n}\,{S}^2\right) }\).

  3. Except for distributions with limited support, where such a correction might give infeasible values.

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  1. Michal Kaut

    Present address: Department of Applied Economics and Operations Research, SINTEF Technology and Society, Trondheim, Norway

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  1. Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology (NTNU), Trondheim, Norway

    Michal Kaut

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Kaut, M. A copula-based heuristic for scenario generation. Comput Manag Sci 11, 503–516 (2014). https://doi.org/10.1007/s10287-013-0184-4

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