A moment-matching method to generate arbitrage-free scenarios

A moment-matching method to generate arbitrage-free scenarios

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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: ,
Keywords: scenario analysis and planning, arbitrage, algebraic optimization
Abstract:

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.

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