Copula Effect on Scenario Tree.docVIP

IAENG International Journal of Applied Mathematics, 37:2, IJAM_37_2_08 ______________________________________________________________________________________ Copula Effect on Scenario Tree K. Sutiene and H. Pranevicius employees the set of available past data with the aim of building Abstract—Multistage stochastic programs are effective for solving long-term planning problems under uncertainty. Such programs are usually based on scenario generation model about future environment developments. In the present paper, the scenario model is developed for the case when enough data paths can be generated, but due to solvability of stochastic program the scenario tree has to be constructed. The proposed strategy is to generate multistage scenario tree from the set of individual scenarios by bundling scenarios based on cluster analysis. The K-means clustering approach is modified to capture the interstage dependencies. Such generation of scenario tree can be useful in cases when it is difficult to construct the adequate scenario tree from the stochastic differential equations or time-series models, and the sampled paths can be obtained by sampling or resampling submodels for each individual stochastic parameter. These submodels are used to generate a set of scenarios that encapsulate the consistent depictions of pathways to possible and futures based on assumptions about economic technological developments. Thus, the factors driving risky events are approximated by a discrete set of scenarios, or sequence of events. This process is known as scenario generation. Scenarios can be generated using various methods, based on different principles: conditional sampling, sampling from given marginals and correlations, moment matching, path based methods, optimal discretization, as in [3]–[7]. Stochastic programming (optimization) has been applied in the foll