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A moment-matching method to generate arbitrage-free scenarios

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  • Staino, Alessandro
  • Russo, Emilio

Abstract

We propose a new moment-matching method to build scenario trees that rule out arbitrage opportunities when describing the dynamics of financial assets. The proposed scenario generator is based on the monomial method, a technique to solve systems of algebraic equations. Extensive numerical experiments show the accuracy and efficiency of the proposed moment-matching method when solving financial problems in complete and incomplete markets.

Suggested Citation

  • Staino, Alessandro & Russo, Emilio, 2015. "A moment-matching method to generate arbitrage-free scenarios," European Journal of Operational Research, Elsevier, vol. 246(2), pages 619-630.
    • Handle: RePEc:eee:ejores:v:246:y:2015:i:2:p:619-630
    DOI: 10.1016/j.ejor.2015.04.045
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    References listed on IDEAS

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    1. Consiglio, Andrea & Carollo, Angelo & Zenios, Stavros A., 2014. "Generating Multi-factor Arbitrage-Free Scenario Trees with Global Optimization," Working Papers 13-35, University of Pennsylvania, Wharton School, Weiss Center.
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