Approximation of Continuous-State Scenario Processes in Multi-Stage Stochastic Optimization and its Applications

Transcription

1 Approximation of Continuous-State Scenario Processes in Multi-Stage Stochastic Optimization and its Applications Anna Timonina University of Vienna, Abraham Wald PhD Program in Statistics and Operations Research. Supervisor Prof. Georg Pflug International Institute for Applied Systems Analysis (IIASA), Risk, Policy and Vulnerability Program Anna Timonina (Uni Wien) Stochastic Approximation 1 / 44

2 Initial Problem Description max{a[h(x, ξ); F] : x F, x X}, x A(, ) is a multi-period acceptability functional (E, AV@R...); H(x, ξ) is the (intermediate) loss/profit function; ξ = (ξ 1,..., ξ T ) is a stochastic process on (Ω, F = (F 1,..., F T ), P), where F is a filtration. x = (x 0,..., x T 1 ) are the decision functions; x F is a non-anticipativity condition (means that x t is measurable w.r.t. F t for all t). That is a variational problem that could be solved only in very special cases. Anna Timonina (Uni Wien) Stochastic Approximation 2 / 44

3 Problem Approximation max{a[h(x, ξ); F] : x F, x X}, x How to solve this problem though in general it is unsolvable? We approximate this problem by a simpler one: max{a[h( x, ξ); F] : x F, x X}, x that is a tree structured problem of huge but finite dimension, where Ω is a finite probability space; F is a finite filtration; x is a high dimensional vector. Anna Timonina (Uni Wien) Stochastic Approximation 3 / 44

4 From data to tree models modeling approx data parameter scenario estimation process scenario tree Example Energy demand, that can be described by, for example, by SARIMA or GARCH models, can be represented in terms of the scenario tree as soon as the parameters of the model are estimated and the approximation is done. For example, GARCH model with ɛ t = σ t z t ξ t = µ + β 1 ξ t 1 + ɛ t, where σ 2 t = κ + γ 1 σ 2 t γ nσ 2 t n + α 1 ɛ 2 t α mɛ 2 t m. Anna Timonina (Uni Wien) Stochastic Approximation 4 / 44

5 Filtration as a tree ξ = (ξ 1,..., ξ T ) a stochastic process defined on (Ω, F, P); ξ = ( ξ 1,..., ξ T ) a finite valued scenario process defined on ( Ω, F, P). It is not natural to construct approximations on the same probability space, because concrete decision problems are given without reference on a probability space, they are given in distributional setups. As the stochastic process ξ is given by its continuous probability distribution only, we need to approximate this distribution by discrete one, i.e. to generate points from this distribution. Hence, our aim is 1 To generate points from the given distribution (using different quantization algorithms); 2 To solve the multi-stage stochastic optimization program using the generated points. For these purposes we represent stochastic process ξ = ( ξ 1,..., ξ T ) as a finitely valued tree. Anna Timonina (Uni Wien) Stochastic Approximation 5 / 44

6 Sample tree Figure: High bushiness v.s. Low bushiness Definition Consider a finitely valued stochastic process ξ = ( ξ 1,..., ξ T ) that is represented by the tree with the same number of successors b t for each node at the stage t, t = 1,..., T. The vector bush = (b 1,..., b T ) is a bushiness vector of the tree. Anna Timonina (Uni Wien) Stochastic Approximation 6 / 44

7 Kantorovich distance between measures Definition The Kantorovich distance between measures is defined as d KA (P, P) = inf { d(w, w)π[dw, d w]}, π Ω Ω π[ Ω] = P( ), π[ω ] = P( ). Wasserstein distance: d WAr (P, P) = inf π { Ω Ω d(w, w)r π[dw, d w]} 1 r under the same constraints. Anna Timonina (Uni Wien) Stochastic Approximation 7 / 44

8 Nested distance between trees Definition The multistage distance (see [1, 2]) of two process-and-information structures is dl r (P, P) = inf ( d(w, w) r π(dw, d w)) 1 r, π dl 1 (P, P) := dl(p, P), where P, P are nested distributions (containing information about filtration structure, values and probabilities) π[a Ω F t F t ](w, w) = P(A F t )(w), (A F T, 1 t T ), π[ω B F t F t ](w, w) = P(B F t )( w), (B F T, 1 t T ). Anna Timonina (Uni Wien) Stochastic Approximation 8 / 44

9 Recursive Structure of the Nested Distance Distance between leaves of the tree (t = T ): The nested distance between last stages of tree models P and P conditional on nodes n T 1 and ñ T 1 is equal to the Kantorovich distance, i.e. dl(p T :T n T 1, P T :T ñ T 1 ) = d KA (P T ( n T 1 ), P T ( ñ T 1 )). Nested distance between subtrees ( t = 2,..., T 1): For each stage t = 2,..., T 1, the nested distance dl(p t:t n t 1, P t:t ñ t 1 ) can be received as the solution of the linear program (0.3) with the distance matrix d nt,ñ t = d(n t, ñ t ) + dl(p t+1:t nt, P t+1:t ñt ), given that the distance dl(p t+1:t nt, P t+1:t ñt) is calculated at the previous step. Resulting nested distance (t = 1): The resulting nested distance is implied by the previous step for the case t = 1. Anna Timonina (Uni Wien) Stochastic Approximation 9 / 44

10 Nested distance approximation The fundamental result of [2] says that v(p) v( P) L β dl(p, P). According to the triangle inequality that holds for the nested distance, we can write dl(p, P) dl(p, P) + dl(p, P ). In order to approximate the distance d(p, P) between stochastic process and tree P by the distance d( P, P ) between tree P and the process approximation (tree P ) we should guarantee that the distance between stochastic process ξ and its approximation (tree P ) is small enough: dl(p, P ) ε. We can guarantee it if we are increasing the bushiness of the tree P, because in this case dl(p, P ) 0 and dl(p, P) dl(p, P). Anna Timonina (Uni Wien) Stochastic Approximation 10 / 44

11 Initial Lower Bound Theorem (Lower Bound (initial), see [2]) Let P and P be two nested distributions and let P and P be the pertaining multivariate distributions respectively. Then d WAr (P, P) dl r (P, P), where d WAr (P, P) is the Wasserstein distance of order r. Anna Timonina (Uni Wien) Stochastic Approximation 11 / 44

12 Initial Upper Bound Theorem (Upper Bound (initial), see [2]) Let P be a nested distribution, P its multivariate distribution, which is dissected into the chain P = P 1 P 2... P T of conditional distributions. If t = 1,..., T the Lipschitz property holds, i.e. d KA (P t ( u), P t ( v)) K t d(u, v), then d KA (P, P) dl(p, P) T d KA (P t, P T t ) (K s + 1). t=1 s=t+1 Anna Timonina (Uni Wien) Stochastic Approximation 12 / 44

13 Stage-wise optimal quantization Optimal quantization means: 1 to find optimal supporting points z i, i = 1,..., N (z 1 z 2... z N ): min z=(z 1,...,z N ) min d(x, z s ) r dp(x) s 2 given the supporting points z i, to find the probabilities p i, such that d KA (P, P) min. Anna Timonina (Uni Wien) Stochastic Approximation 13 / 44

14 Stage-wise optimal quantization on a treestructure The stage-wise optimal tree approximation of the stochastic process ξ = (ξ 1,..., ξ T ) solves the minimization problem dl(p, P) T d KA (P t, P t ) t=1 T s=t+1 (K s + 1) min 1 First stage of the tree has N 1 nodes. We generate N 1 values of ξ 1 according to the unconditional probability distribution of ξ 1 ; 2 For each of the following stages t = 2,..., T we generate ξ t according to the conditional distribution of ξ t given the historical values of the random variables ξ t 1. Anna Timonina (Uni Wien) Stochastic Approximation 14 / 44

15 New results Anna Timonina (Uni Wien) Stochastic Approximation 15 / 44

16 Is there any chance to improve? Yes, it can and the minimal upper bound DOES NOT mean that the nested distance is minimal: a. b. Figure: Behavior of the nested distance between stochastic process and a tree. Anna Timonina (Uni Wien) Stochastic Approximation 16 / 44

17 Clairvoyant tree structure Structure of the initial tree Structure of the clairvoyant tree Stage of the tree Stage of the tree Figure: From primal to the clairvoyant tree. Anna Timonina (Uni Wien) Stochastic Approximation 17 / 44

18 From primal to the clairvoyant tree Definition (Clairvoyant tree) Tree model P c is called clairvoyant at/from stage t and denoted by P c(t) if every node n N s, s = t + 1,..., T 1 has unique successor with probability 1 (N s is the set of all node indexes at the stage s) (see Fig. 3). Out of the tree P, it is possible to receive another tree P c(t) by changing the tree structure of P so, that it becomes clairvoyant starting from the stage t. P(ξ 1, ξ 2,..., ξ T ) = P(ξ 1 ) P(ξ 2 ξ 1 )... P(ξ T ξ 1,..., ξ T 1 ), P(ξ 1, ξ 2,..., ξ T ) = P(ξ 1 ) P(ξ 2 ξ 1 )... P c(t) (ξ t,..., ξ T ξ t 1,..., ξ 1 ). Notice, that here we used the fact that the multivariate probability P(ξ 1, ξ 2,..., ξ T ) is the same for the initial and the clairvoyant trees, as well as the conditional probabilities up to time t 1. Anna Timonina (Uni Wien) Stochastic Approximation 18 / 44

19 Improved Lower Bound Theorem (Lower Bound (new)) Let P and P be two nested distributions with corresponding multivariate distributions P and P and suppose that clairvoyant nested distributions P c(t) and P c(t) are defined respectively t = 1,..., T. Then the following chain of lower bounds for the nested distance between P and P holds: d KA (P, P) = dl(p c(1), P c(1) ))... dl(p c(t), P c(t) ) dl(p c(t 1), P c(t 1) ) dl(p c(t ), P c(t ) ) = dl(p, P). Anna Timonina (Uni Wien) Stochastic Approximation 19 / 44

20 Counterexample: what if to change only one of the trees to clairvoyant? (see MatLab example) Anna Timonina (Uni Wien) Stochastic Approximation 20 / 44

21 Improved Upper Bound Theorem (Improved Upper Bound (new)) Let P and P be two nested distributions with corresponding multivariate distributions P and P dissected into the chain of conditional probabilities P = P 1 P 2... P T and P = P 1 P 2... P T. Then, dl(p, P) T sup d KA (P t t+1:t ( u t 1 ), P t t+1:t ( v t 1 )), u t 1,v t 1 t=1 where P t t+1:t ( u t 1 ) and P t t+1:t ( u t 1 ) are conditional multivariate distributions sitting at the stage t of clairvoyant trees P c(t) and P c(t). Moreover, if t = 1,..., T the Lipschitz property holds, then dl(p, P) T d KA (P t t+1:t, P t t+1:t ) t=1 T s=t+1 (K s s+1:t + 1). Anna Timonina (Uni Wien) Stochastic Approximation 21 / 44

22 Backtracking Optimal Quantization dl(p, P) T d KA (P t t+1:t, P t t+1:t ) t=1 1 FORWARD: using the stage-wise optimal quantization algorithm we receive the first approximation of the quantizers for the stages t = 1,..., T ; 2 BACKWARD: starting with the stage T 1 we adapt all the quantizers of the stages t = 1,..., T 1 so, that the Kantorovich distance between the joint probability distribution of P t:t and its discrete approximation is minimized. T s=t+1 (K s s+1:t + 1) min. Anna Timonina (Uni Wien) Stochastic Approximation 22 / 44

23 Backtracking Optimal Quantization In order to adapt the quantizers ξ t of the stage t to the possible future scenarios t + 1 : T we generate N random points x t:t and for each of them we move the closest quantizer towards it keeping the future quantizers ξ t+1,..., ξ T at the given level. Anna Timonina (Uni Wien) Stochastic Approximation 23 / 44

24 Example: Joint Adaptation Figure: Joint Adaptation Algorithm. Anna Timonina (Uni Wien) Stochastic Approximation 24 / 44

25 Is there an improvement? Yes, there is: Figure: Improvement due to the Backtracking Optimal Quantization. Anna Timonina (Uni Wien) Stochastic Approximation 25 / 44

26 MatLab examples: does the tree improve? Anna Timonina (Uni Wien) Stochastic Approximation 26 / 44

27 Example: Backtracking Optimal Quantization (random) 1 dl(tree, lp)= dl(tree imp., lp)= Tree 1 Tree improved Values on the nodes Values on the nodes Stage of the tree Stage of the tree Figure: Decrease in the nested distance due to the improvement in random quantizers. Anna Timonina (Uni Wien) Stochastic Approximation 27 / 44

28 Example: Backtracking Optimal Quantization (optimal) 1.2 dl(tree, lp)= dl(tree imp., lp)= Tree 1.2 Tree improved Values on the nodes Values on the nodes Stage of the tree Stage of the tree Figure: Decrease in the nested distance due to the improvement in stage-wise optimal quantizers. Anna Timonina (Uni Wien) Stochastic Approximation 28 / 44

29 Applications Anna Timonina (Uni Wien) Stochastic Approximation 29 / 44

30 Applications Real life: 1 Energy, finance; 2 Risk-management of catastrophic events: scenario generation based on the historical probability loss disribution; Virtual life: 1 Networks, Internet: PageRank problem of Google in the multi-stage environment. Anna Timonina (Uni Wien) Stochastic Approximation 30 / 44

31 Inventory Control Problem Anna Timonina (Uni Wien) Stochastic Approximation 31 / 44

32 Example: inventory control problem The grocery shop has to place regular orders one period ahead. ξ 1,..., ξ T is the demand for goods of the shop at times t = 1,..., T ; x t 1, t = 1,..., T is an order of goods one period ahead; 1 l t is a storage loss; rapid orders are possible for a price of u t > 1 per piece; The selling price is s t (s t > 1) and the final inventory K T has a value l T K T. T E[ (s t ξ t x t 1 u t M t ) + l T K T ] max x t=1 subject to x t F t, t = 1,..., T, l t 1 K t 1 + x t 1 ξ t = K t M t. K t 0, M t 0. Anna Timonina (Uni Wien) Stochastic Approximation 32 / 44

33 Inventory Control Problem If we consider the demand ξ lnn (µ, C), we are able to calculate the exact analytical solution (violet color in the figure): Figure: Inventory Control Problem. Anna Timonina (Uni Wien) Stochastic Approximation 33 / 44

34 Natural Disasters Risk-Management (IIASA) Anna Timonina (Uni Wien) Stochastic Approximation 34 / 44

35 Fundamentals Governments of countries with high risk of natural hazard and low risk capital are to decide how much to spend for protection of the catastrophic event and how much for recovery after it. Multi-period approach arises because of the uncertainty about the recurrence of the catastrophic event and the risk of zero risk capital at this point. Multi-hazard approach appears as there might be the dependence of one catastrophic event on another, i.e. one catastrophic event occurs as a result of another with some probability. Anna Timonina (Uni Wien) Stochastic Approximation 35 / 44

36 Multi-period approach Multi-stage stochastic programs are the standard and well-established tool to support decision making under uncertainty. The goal is 1 To construct the multi-stage decision model for adaptation and mitigation of natural hazard events; 2 To specify loss distributions for natural hazard events (type and parameters); 3 To approximate these distributions by discrete ones; 4 To construct a surrogate finite dimensional problem which is accessible to computer solution; 5 To solve the surrogate problem and to study the quality of approximation and to infer policy implications. Anna Timonina (Uni Wien) Stochastic Approximation 36 / 44

37 Risk-management of CAT-events Anna Timonina (Uni Wien) Stochastic Approximation 37 / 44

38 Problem description D 0 z k,0 ξ k,1, D 1 z k,t 1 ξ k,t, D t z T 1 ξ k,t S 0 x 0 x 1 x S 1... t 1 x t x S t... T 1 S T z k,0, C 0 z k,1, C 1, D 0 i 0 z k,t, C t, j D ji j C T, j D j Risk-neutral: (1 α) T ρ t E(c t ) + αe(s T ) t=1 max d t,c t,z t,x t Risk-averse: (1 α) T ρ t E(u(c t )) + αe(u(s T )) max, with u(x) = x γ 1 d t,c t,z t,x t γ t=1 Anna Timonina (Uni Wien) Stochastic Approximation 38 / 44

39 Types of loss distributions Pareto Heavy-tail distribution (that allows large deviation of losses) corresponds to the situation when natural hazard can be of different power. Lognormal This type of loss distribution corresponds nicely to the situation when the variable represents the compound loss from a sequence of many natural hazard events. Anna Timonina (Uni Wien) Stochastic Approximation 39 / 44

40 Generating v.s. Quantization Suppose that the distribution of the random variable ξ that describes losses in case of natural hazard is known. Then we can generate losses and their probabilities by Monte-Carlo random sampling; Choice of scenarios by optimal discretization; and see how the optimal value and optimal decision change when we increase number of possible scenarios. Anna Timonina (Uni Wien) Stochastic Approximation 40 / 44

41 CAT optimal solution Figure: Stage-wise optimal quantization v.s. random generation a. Anna Timonina (Uni Wien) Stochastic Approximation 41 / 44

42 CAT-decisions Figure: Mongolia and Mexico optimal strategy for 3 years a. Anna Timonina (Uni Wien) Stochastic Approximation 42 / 44

43 Thank you for your attention! Anna Timonina (Uni Wien) Stochastic Approximation 43 / 44

44 G. Ch. Pflug, A. Pichler. A distance for multi-stage stochastic optimization models. SIAM Journal on Optimization 22, pp. 1-23, G. Ch. Pflug, A. Pichler. Approximations for probability distributions and stochastic optimization problems. Int. Series in OR and Management Science 163, Chapter 15, pp , G. Ch. Pflug, W. Römisch. Modeling, Measuring and Managing Risk. 301 pages, World Scientific Publishing, ISBN W. Römisch. Scenario generation. Wiley Encyclopedia of Operations Research and Management Science (J.J. Cochran ed.), Wiley, A.V. Timonina. Multi-stage Stochastic Optimization: the Distance between Stochastic Scenario Processes. Springer-Verlag Berlin Heidelberg, DOI /s Anna Timonina (Uni Wien) Stochastic Approximation 44 / 44