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Model Aggregation for Risk Evaluation and Robust Optimization

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  • Tiantian Mao
  • Ruodu Wang
  • Qinyu Wu

Abstract

We introduce a new approach for prudent risk evaluation based on stochastic dominance, which will be called the model aggregation (MA) approach. In contrast to the classic worst-case risk (WR) approach, the MA approach produces not only a robust value of risk evaluation but also a robust distributional model, independent of any specific risk measure. The MA risk evaluation can be computed through explicit formulas in the lattice theory of stochastic dominance, and under some standard assumptions, the MA robust optimization admits a convex-program reformulation. The MA approach for Wasserstein and mean-variance uncertainty sets admits explicit formulas for the obtained robust models. Via an equivalence property between the MA and the WR approaches, new axiomatic characterizations are obtained for the Value-at-Risk (VaR) and the Expected Shortfall (ES, also known as CVaR). The new approach is illustrated with various risk measures and examples from portfolio optimization.

Suggested Citation

  • Tiantian Mao & Ruodu Wang & Qinyu Wu, 2022. "Model Aggregation for Risk Evaluation and Robust Optimization," Papers 2201.06370, arXiv.org, revised Oct 2023.
  • Handle: RePEc:arx:papers:2201.06370
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    File URL: http://arxiv.org/pdf/2201.06370
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    Cited by:

    1. Yuanying Guan & Zhanyi Jiao & Ruodu Wang, 2022. "A reverse ES (CVaR) optimization formula," Papers 2203.02599, arXiv.org, revised May 2023.
    2. Ruoxuan Li & Wenhua Lv & Tiantian Mao, 2023. "Shortfall-Based Wasserstein Distributionally Robust Optimization," Mathematics, MDPI, vol. 11(4), pages 1-25, February.
    3. Christopher Chambers & Alan Miller & Ruodu Wang & Qinyu Wu, 2024. "Max-stability under first-order stochastic dominance," Papers 2403.13138, arXiv.org.

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