Multilevel nested simulation for efficient risk estimation

DOI10.1137/18M1173186zbMATH Open1457.91416arXiv1802.05016OpenAlexW2962965244WikidataQ127931403 ScholiaQ127931403MaRDI QIDQ5228366FDOQ5228366

Abdul-Lateef Haji-Ali, Mike Giles

Publication date: 12 August 2019

Published in: SIAM/ASA Journal on Uncertainty Quantification (Search for Journal in Brave)

Abstract: We investigate the problem of computing a nested expectation of the form $mathbbP[mathbbE[X|Y]!geq!0]!=!mathbbE[extrmH(mathbbE[X|Y])]$ where $extrmH$ is the Heaviside function. This nested expectation appears, for example, when estimating the probability of a large loss from a financial portfolio. We present a method that combines the idea of using Multilevel Monte Carlo (MLMC) for nested expectations with the idea of adaptively selecting the number of samples in the approximation of the inner expectation, as proposed by (Broadie et al., 2011). We propose and analyse an algorithm that adaptively selects the number of inner samples on each MLMC level and prove that the resulting MLMC method with adaptive sampling has an $mathcalOleft(varepsilo{n}^{-2}|logvarepsilon{|}^{2}ight)$ complexity to achieve a root mean-squared error $varepsilon$. The theoretical analysis is verified by numerical experiments on a simple model problem. We also present a stochastic root-finding algorithm that, combined with our adaptive methods, can be used to compute other risk measures such as Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR), with the latter being achieved with $mathcalOleft(varepsilo{n}^{-2}ight)$ complexity.

Full work available at URL: https://arxiv.org/abs/1802.05016

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zbMATH Keywords

Monte Carlorisk estimationmultilevel Monte Carlonested simulation

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Numerical methods (including Monte Carlo methods) (91G60) Statistical methods; risk measures (91G70) Portfolio theory (91G10)

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• Martingale Transforms
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• Limit theorems for weighted and regular multilevel estimators
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Cited In (15)

• Multilevel double loop Monte Carlo and stochastic collocation methods with importance sampling for Bayesian optimal experimental design
• Decision-making under uncertainty: using MLMC for efficient estimation of EVPPI
• Multilevel Monte Carlo for computing the SCR with the standard formula and other stress tests
• Multi-index antithetic stochastic gradient algorithm
• Adaptive Multilevel Monte Carlo for Probabilities
• Multilevel Monte Carlo Estimation of the Expected Value of Sample Information
• Numerical approximations of McKean anticipative backward stochastic differential equations arising in initial margin requirements
• Sample recycling method -- a new approach to efficient nested Monte Carlo simulations
• Multilevel Monte Carlo estimation of expected information gains
• Multilevel Monte Carlo methods and lower-upper bounds in initial margin computations
• Multilevel Monte Carlo Approximation of Functions
• Antithetic multilevel sampling method for nonlinear functionals of measure
• Variance reduction for risk measures with importance sampling in nested simulation
• An efficient estimation of nested expectations without conditional sampling
• Constructing unbiased gradient estimators with finite variance for conditional stochastic optimization

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