Gradient‐based simulation optimization under probability constraints

We study optimization problems subject to possible fatal failures. The probability of failure should not exceed a given confidence level. The distribution of the failure event is assumed unknown, but it can be generated via simulation or observation of historical data. Gradient‐based simulation–optimization methods pose the difficulty of the estimation of the gradient of the probability constraint under no knowledge of the distribution. In this work we provide two single‐path estimators with bias: a convolution method and a finite difference, and we provide a full analysis of convergence of the Arrow–Hurwicz algorithm, which we use as our solver for optimization. Convergence results are used to tune the parameters of the numerical algorithms in order to achieve best convergence rates, and numerical results are included via an example of application in finance.