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A provisioning problem with stochastic payments

  • Pagnoncelli, Bernardo K.
  • Vanduffel, Steven
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    We consider the problem of determining the minimal requirement one must establish in order to meet a series of future random payments. It is shown in a very general setting that this problem can be recast as a chance constrained model and how the technique of Sample Average Approximation can be employed to find solutions. We also use comonotonic theory to analyze analytical approximations in a restricted Gaussian setting. Our numerical illustrations demonstrate that the Sample Average Approximation is a viable and efficient way to solve the stated problem generally and outperforms the analytical approximations. In passing we present a result that is related to Stein’s famous lemma (Stein, 1981) and is of interest in itself.

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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 221 (2012)
    Issue (Month): 2 ()
    Pages: 445-453

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    Handle: RePEc:eee:ejores:v:221:y:2012:i:2:p:445-453
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    8. Vanduffel, Steven & Shang, Zhaoning & Henrard, Luc & Dhaene, Jan & Valdez, Emiliano A., 2008. "Analytic bounds and approximations for annuities and Asian options," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 1109-1117, June.
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