Solving overall risk minimization by stationary policy heuristics

Abstract We propose a heuristic method for solving the overall risk minimization problem, specifically the infinite-horizon dynamic programming problem, which uses a coherent risk measure of the overall discounted reward as its criterion. The original problem is very complex, and its optimal policies may depend on the entire history of previous decisions. The heuristic consists in restricting attention to Markov policies—those depending only on the current state—and in consecutive local approximations of the criterion, a static coherent risk measure, by its nested dynamic counterpart: a limit nested risk measure. The approximating problems with the nested measures can be reformulated using the Bellman equation and, as such, can be solved by standard algorithms. We introduce several variants of this heuristic. Consequently, we conduct three numerical experiments, all of which demonstrate the efficiency of our heuristic in finding effective solutions. Due to its speed, the heuristic is suitable for finding “good enough” solutions, which may be further refined.

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Publication Details

Journal
Annals of Operations Research
Published
2026-01-03
DOI
https://doi.org/10.1007/s10479-025-06989-8
Primary Topic
Risk and Portfolio Optimization
Type
article
Field-Weighted Citation Impact
0.00

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article

Solving overall risk minimization by stationary policy heuristics

Miloš Kopa, Martin Smíd
Annals of Operations Research
Risk and Portfolio Optimization
article

Solving overall risk minimization by stationary policy heuristics

Miloš Kopa, Martin Smíd
article en

Abstract

Abstract We propose a heuristic method for solving the overall risk minimization problem, specifically the infinite-horizon dynamic programming problem, which uses a coherent risk measure of the overall discounted reward as its criterion. The original problem is very complex, and its optimal policies may depend on the entire history of previous decisions. The heuristic consists in restricting attention to Markov policies—those depending only on the current state—and in consecutive local approximations of the criterion, a static coherent risk measure, by its nested dynamic counterpart: a limit nested risk measure. The approximating problems with the nested measures can be reformulated using the Bellman equation and, as such, can be solved by standard algorithms. We introduce several variants of this heuristic. Consequently, we conduct three numerical experiments, all of which demonstrate the efficiency of our heuristic in finding effective solutions. Due to its speed, the heuristic is suitable for finding “good enough” solutions, which may be further refined.

Annals of Operations Research
Charles University (CZ), Czech Academy of Sciences, Institute of Information Theory and Automation (CZ)
Grantová Agentura České Republiky
Openalex Percentile: Top 98%
Risk and Portfolio Optimization
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