Distributionally robust optimization with polynomial densities: theory, models and algorithms
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Publication:2189441
Abstract: In distributionally robust optimization the probability distribution of the uncertain problem parameters is itself uncertain, and a fictitious adversary, e.g., nature, chooses the worst distribution from within a known ambiguity set. A common shortcoming of most existing distributionally robust optimization models is that their ambiguity sets contain pathological discrete distribution that give nature too much freedom to inflict damage. We thus introduce a new class of ambiguity sets that contain only distributions with sum-of-squares polynomial density functions of known degrees. We show that these ambiguity sets are highly expressive as they conveniently accommodate distributional information about higher-order moments, conditional probabilities, conditional moments or marginal distributions. Exploiting the theoretical properties of a measure-based hierarchy for polynomial optimization due to Lasserre [SIAM J. Optim. 21(3) (2011), pp. 864--885], we prove that certain worst-case expectation constraints are computationally tractable under these new ambiguity sets. We showcase the practical applicability of the proposed approach in the context of a stylized portfolio optimization problem and a risk aggregation problem of an insurance company.
The authors present first steps towards using SOS polynomial densities in distributionally robust optimization for problems that display a polynomial dependence on the uncertain parameters. The proposed framework is tractable for SOS density functions of any fixed degree. This approach shows flexibility in modelling in sense of encoding various salient features of the unknown distribution of the uncertain parameters through linear constraints and/or linear matrix inequalities. In the limit, as the degree of the SOS density functions tends to infinity, one recovers the usual robust counterpart or generalized moment problem. On the other hand, the approach is not applicable to objective or constraint functions that display a general (decision-dependent) piecewise polynomial dependence on the uncertain parameters as it is the case for the recourse functions of linear two-stage stochastic programs. Moreover, this approach often reduces distributionally robust optimization problems to generalized eigenvalue problems or even semidefinite programs of large sizes that are poorly conditioned.
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