Robust spectral risk optimization when information on risk spectrum Is incomplete

Wang, Wei and Xu, Huifu (2020) Robust spectral risk optimization when information on risk spectrum Is incomplete. SIAM Journal on Optimization, 30 (4), 3198-3229. (doi:10.1137/19M1284270).

Record type: Article

Abstract

A spectral risk measure (SRM) is a weighted average of value at risk where the weighting function (also known as risk spectrum or distortion function) characterizes a decision maker's risk attitude. In this paper, we consider the case where the decision maker's risk spectrum is ambiguous and introduce a robust SRM model based on the worst risk spectrum from a ball of risk spectra centered at a nominal risk spectrum. When the ball consists of step-like risk spectra, we show that the robust SRM can be computed by solving a linear programming problem. For the general case, we propose a step-like approximation scheme and derive an error bound for the approximation. As an application, we apply the proposed robust SRM to one-stage stochastic optimization with the objective of minimizing the robust SRM and propose an alternating iterative algorithm for solving the resulting minimax optimization problem. Moreover, to examine stability of the robust spectral risk optimization model with respect to perturbation of observed data from the underlying exogenous uncertainty in data-driven environments, we investigate statistical robustness of the model and derive sufficient conditions for the required stability.

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