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Two-Level Simulations for Risk Management
Company: Proceedings of the 2007 INFORMS Simulation Society Workshop
Year Of Publication: 2007
Month Of Publication: May
Pages: 6
Download Count: 5
View Count: 1379
Comment Num: 0
Language: English
Source: conference proceedings
Who Can Read: Free
Date: 1-8-2012
Publisher: Administrator
Summary
Risk measurement involves estimating some functional of a loss distribution. This calls for nested simulation, in which risk factors are sampled at an outer level of simulation, while the inner level of simulation provides estimates of loss given each realization of the risk factors. We present a general method for providing a confidence interval for the risk measurement. It involves combining a confidence region for the losses with the confidence interval that would be used if the losses were known. This method could be very time-consuming, so we discuss ways of improving its efficiency. One is to choose the structure of the confidence region for the losses in a way that is tailored to the particular risk measure. Another involves varying the simulation effort expended on estimating the losses associated with different risk factors, even screening out many of the risk factors after slight simulation effort has revealed them to be unlikely to have much impact on the estimated risk measure. We will discuss two-level simulation in general and a specific procedure for estimating a confidence interval for tail conditional expectation.
Author(s)
Lan, Hai Sign in to follow this author
Nelson, Barry L. Sign in to follow this author
Staum, Jeremy Sign in to follow this author
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