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Rare event probabilities in stochastic networks

  • A. Gouda
  • T. Szántai


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    The paper is dealing with estimation of rare event probabilities in stochastic networks. The well known variance reduction technique, called Importance Sampling (IS) is an effective tool for doing this. The main idea of IS is to simulate the random system under a modified set of parameters, so as to make the occurrence of the rare event more likely. The major problem of the IS technique is that the optimal modified parameters, called reference parameters to be used in IS are usually very difficult to obtain. Rubinstein (Eur J Oper Res 99:89–112, 1997) developed the Cross Entropy (CE) method for the solution of this problem of IS technique and then he and his collaborators applied this for estimation of rare event probabilities in stochastic networks with exponential distribution [see De Boer et al. (Ann Oper Res 134:19–67, 2005)]. In this paper, we test this simulation technique also for medium sized stochastic networks and compare its effectiveness to the simple crude Monte Carlo (CMC) simulation. The effectiveness of a variance reduction simulation algorithm is measured in the following way. We calculate the product of the necessary CPU time and the estimated variance of the estimation. This product is compared to the same for the simple Crude Monte Carlo simulation. This was originally used for comparison of different variance reduction techniques by Hammersley and Handscomb (Monte Carlo Methods. Methuen & Co Ltd, London, 1967). The main result of the paper is the extension of CE method for estimation of rare event probabilities in stochastic networks with beta distributions. In this case the calculation of reference parameters of the importance sampling distribution requires numerical solution of a nonlinear equation system. This is done by applying a Newton–Raphson iteration scheme. In this case the CPU time spent for calculation of the reference parameter values cannot be neglected. Numerical results will also be presented. Copyright Springer-Verlag 2008

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    Article provided by Springer in its journal Central European Journal of Operations Research.

    Volume (Year): 16 (2008)
    Issue (Month): 4 (December)
    Pages: 441-461

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    Handle: RePEc:spr:cejnor:v:16:y:2008:i:4:p:441-461
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    1. Csaba Fábián & Zoltán Szőke, 2007. "Solving two-stage stochastic programming problems with level decomposition," Computational Management Science, Springer, vol. 4(4), pages 313-353, October.
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