Parameter estimation in stochastic scenario generation systems Academic Article uri icon

abstract

  • Scenario analysis offers an effective tool for addressing the stochastic elements in multi-period financial planning models. Critical to any scenario generation process is the estimation of the input parameters of the underlying stochastic model for economic factors. In this paper, we propose a new approach for estimation, known as the integrated parameter estimation (IPE). This approach combines the significant features of other well-known estimation techniques within a non-convex multiple objective optimization framework, with the objective weights controlling the relative importance of the features. We solve the non-convex optimization problem using adaptive memory programming - a variation of tabu search. Based on a short interest rate model using UK treasury rates from 1980 to 1995, the integrated approach compares favorably with maximum likelihood and the generalized method of moments. We also evaluate performance with Towers Perrin's CAP:Link scenario generation system.

published proceedings

  • European Journal of Operational Research

author list (cited authors)

  • Mulvey, J. M., Rosenbaum, D. P., & Shetty, B.

citation count

  • 16

complete list of authors

  • Mulvey, John M||Rosenbaum, Daniel P||Shetty, Bala

publication date

  • November 1999