Article ID: | iaor201527308 |
Volume: | 246 |
Issue: | 2 |
Start Page Number: | 619 |
End Page Number: | 630 |
Publication Date: | Oct 2015 |
Journal: | European Journal of Operational Research |
Authors: | Staino Alessandro, Russo Emilio |
Keywords: | scenario analysis and planning, arbitrage, algebraic optimization |
We propose a new moment‐matching method to build scenario trees that rule out arbitrage opportunities when describing the dynamics of financial assets. The proposed scenario generator is based on the monomial method, a technique to solve systems of algebraic equations. Extensive numerical experiments show the accuracy and efficiency of the proposed moment‐matching method when solving financial problems in complete and incomplete markets.