A Composite Risk Measure Framework for Decision Making Under Uncertainty

doi:10.1007/s40305-018-0211-9

Abstract

Abstract:

In this paper, we present a unified framework for decision making under uncertainty. Our framework is based on the composite of two risk measures, where the inner risk measure accounts for the risk of decision if the exact distribution of uncertain model parameters were given, and the outer risk measure quantifies the risk that occurs when estimating the parameters of distribution. We show that the model is tractable under mild conditions. The framework is a generalization of several existing models, including stochastic programming, robust optimization, distributionally robust optimization. Using this framework, we study a few new models which imply probabilistic guarantees for solutions and yield less conservative results compared to traditional models. Numerical experiments are performed on portfolio selection problems to demonstrate the strength of our models.

Key words: Risk management, Stochastic programming, Portfolio management

Peng-Yu Qian, Zi-Zhuo Wang, Zai-Wen Wen. A Composite Risk Measure Framework for Decision Making Under Uncertainty[J]. Journal of the Operations Research Society of China, 2019, 7(1): 43-68.

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