Multilevel nested simulation for efficient risk estimation

DOI10.1137/18M1173186MaRDI QIDQ5228366zbMATH OpenOpenAlexWikidataFDO

Authors Mike Giles, Abdul-Lateef Haji-Ali

Publication date 12 August 2019

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

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

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)

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.

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Cites work

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• Multilevel Monte Carlo Path Simulation
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Cited in

(27)

• 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
• Weak error for nested multilevel Monte Carlo
• Multilevel Monte Carlo approximation of functions
• Efficient risk estimation via nested multilevel quasi-Monte Carlo simulation
• Kernel smoothing for nested estimation with application to portfolio risk measurement
• Multilevel Monte Carlo for computing the SCR with the standard formula and other stress tests
• Multi-index antithetic stochastic gradient algorithm
• Technical note—Constructing confidence intervals for nested simulation
• Nested simulation in portfolio risk measurement
• Efficient risk estimation via nested sequential simulation
• Risk estimation via regression
• 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
• MLMC for nested expectations
• Nested Simulations: Theory and Application
• Multilevel Monte Carlo estimation of expected information gains
• The estimator of the variance of conditional expectation and the calculation of value at risk based on the two-level nested simulation
• Efficient nested simulation for estimating the variance of a conditional expectation
• Multilevel Monte Carlo methods and lower-upper bounds in initial margin computations
• Adaptive multilevel Monte Carlo for probabilities
• Multilevel Monte Carlo estimation of the expected value of sample information
• Antithetic multilevel sampling method for nonlinear functionals of measure
• MCMC design-based non-parametric regression for rare event. application to nested risk computations
• An efficient estimation of nested expectations without conditional sampling
• Constructing unbiased gradient estimators with finite variance for conditional stochastic optimization
• Variance reduction for risk measures with importance sampling in nested simulation

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