Uncertainty Propagation and Dynamic Robust Risk Measures

We introduce a framework for quantifying propagation of uncertainty arising in a dynamic setting. Specifically, we define dynamic uncertainty sets designed explicitly for discrete stochastic processes over a finite time horizon. These dynamic uncertainty sets capture the uncertainty surrounding stochastic processes and models, accounting for factors such as distributional ambiguity. Examples of uncertainty sets include those induced by the Wasserstein distance and f-divergences. We further define dynamic robust risk measures as the supremum of all candidates’ risks within the uncertainty set. In an axiomatic way, we discuss conditions on the uncertainty sets that lead to well-known properties of dynamic robust risk measures, such as convexity and coherence. Furthermore, we discuss the necessary and sufficient properties of dynamic uncertainty sets that lead to time-consistencies of dynamic robust risk measures. We find that uncertainty sets stemming from f-divergences lead to strong time-consistency whereas the Wasserstein distance results in a new time-consistent notion of weak recursiveness. Moreover, we show that a dynamic robust risk measure is strong time-consistent or weak recursive if and only if it admits a recursive representation of one-step conditional robust risk measures arising from static uncertainty sets. Funding: M. Mailhot and S. M. Pesenti acknowledge support from the Canadian Statistical Sciences Institute (CANSSI) and from the Natural Sciences and Engineering Research Council of Canada [Grants RGPIN-2015-05447, DGECR-2020-00333, and RGPIN-2020-04289]. M. R. Moresco thanks the Horizon Postdoctoral Fellowship for the support.

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Publication Details

Journal
Mathematics of Operations Research
Published
2024-08-09
DOI
https://doi.org/10.1287/moor.2023.0267
Citations
2
Primary Topic
Risk and Portfolio Optimization
Type
article
Field-Weighted Citation Impact
0.98
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article

Uncertainty Propagation and Dynamic Robust Risk Measures

Silvana M. Pesenti, Mélina Mailhot, Marlon Ruoso Moresco
2 citations
Mathematics of Operations Research
Risk and Portfolio Optimization
0.98
article

Uncertainty Propagation and Dynamic Robust Risk Measures

Silvana M. Pesenti, Mélina Mailhot, Marlon Ruoso Moresco
article en
2 citations

Abstract

We introduce a framework for quantifying propagation of uncertainty arising in a dynamic setting. Specifically, we define dynamic uncertainty sets designed explicitly for discrete stochastic processes over a finite time horizon. These dynamic uncertainty sets capture the uncertainty surrounding stochastic processes and models, accounting for factors such as distributional ambiguity. Examples of uncertainty sets include those induced by the Wasserstein distance and f-divergences. We further define dynamic robust risk measures as the supremum of all candidates’ risks within the uncertainty set. In an axiomatic way, we discuss conditions on the uncertainty sets that lead to well-known properties of dynamic robust risk measures, such as convexity and coherence. Furthermore, we discuss the necessary and sufficient properties of dynamic uncertainty sets that lead to time-consistencies of dynamic robust risk measures. We find that uncertainty sets stemming from f-divergences lead to strong time-consistency whereas the Wasserstein distance results in a new time-consistent notion of weak recursiveness. Moreover, we show that a dynamic robust risk measure is strong time-consistent or weak recursive if and only if it admits a recursive representation of one-step conditional robust risk measures arising from static uncertainty sets. Funding: M. Mailhot and S. M. Pesenti acknowledge support from the Canadian Statistical Sciences Institute (CANSSI) and from the Natural Sciences and Engineering Research Council of Canada [Grants RGPIN-2015-05447, DGECR-2020-00333, and RGPIN-2020-04289]. M. R. Moresco thanks the Horizon Postdoctoral Fellowship for the support.

Mathematics of Operations ResearchVol. 50(3)
Universidade Federal do Rio Grande do Sul (BR), University of Toronto (CA), Concordia University (CA)
Partnerships for the goals
Openalex Percentile: Top 22%
Risk and Portfolio Optimization
0.98
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Uncertainty Propagation and Dynamic Robust Risk Measures — Silvana M. Pesenti, Mélina Mailhot, et al. · Mathematics of Operations Research (2024) | TGRS Research Map | TGRS