An algorithm for sequential tail value at risk for path-independent payoffs in a binomial tree

Research output: Contribution to journalArticleAcademicpeer-review

3 Citations (Scopus)
62 Downloads (Pure)

Abstract

We present an algorithm that determines Sequential Tail Value at Risk (STVaR) for path-independent payoffs in a binomial tree. STVaR is a dynamic version of Tail-Value-at-Risk (TVaR) characterized by the property that risk levels at any moment must be in the range of risk levels later on. The algorithm consists of a finite sequence of backward recursions that is guaranteed to arrive at the solution of the corresponding dynamic optimization problem. The algorithm makes concrete how STVaR differs from TVaR over the remaining horizon, and from recursive TVaR, which amounts to Dynamic Programming. Algorithmic aspects are compared with the cutting-plane method. Time consistency and comonotonicity properties are illustrated by applying the algorithm on elementary examples.
Original languageEnglish
Pages (from-to)463-483
Number of pages21
JournalAnnals of operations research
Volume181
Issue number1
DOIs
Publication statusPublished - 2010

Keywords

  • IR-97452
  • Cutting plane method
  • Dynamic Programming
  • Value at risk
  • METIS-268569
  • Path dependency
  • Tail value at risk
  • Time consistency
  • Dynamic risk measures

Fingerprint Dive into the research topics of 'An algorithm for sequential tail value at risk for path-independent payoffs in a binomial tree'. Together they form a unique fingerprint.

  • Cite this