Abstract
Estimating portfolio risk measures and classifying portfolio risk levels in real time are important yet challenging tasks. In this paper, we propose to build a logistic regression model using data generated in past simulation experiments and to use the model to predict portfolio risk measures and classify risk levels at any time. We further explore regularization techniques, simulation model structure, and additional simulation budget to enhance the estimators of the logistic regression model to make its predictions more precise. Our numerical results show that the proposed methods work well. Our work may be viewed as an example of the recently proposed idea of simulation analytics, which treats a simulation model as a data generator and proposes to apply data analytics tools to the simulation outputs to uncover conditional statements. Our work shows that the simulation analytics idea is viable and promising in the field of financial risk management.
Original language | English (US) |
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Pages (from-to) | 356-375 |
Number of pages | 20 |
Journal | INFORMS Journal on Computing |
Volume | 32 |
Issue number | 2 |
DOIs | |
State | Published - Mar 2020 |
Funding
History: Accepted by Alice Smith, Editor in Chief, and Bruno Tuffin, Area Editor for Simulation. Funding: The research reported in this paper is partially supported by Hong Kong Research Grants Council, General Research Fund [Grants 16203214 and 11504017], National Science Foundation Division of Civil, Mechanical and Manufacturing Innovation [Grant 1537060], National Natural Science Foundation of China [Grant 71801148], and Shanghai Municipal Education Commission Shanghai Young Eastern Scholar Program [N.60-D129-18-202]. Supplemental Material: The online supplement is available at https://doi.org/10.1287/ijoc.2019.0892. The research reported in this paper is partially supported by Hong Kong Research Grants Council, General Research Fund [Grants 16203214 and 11504017], National Science Foundation Division of Civil, Mechanical and Manufacturing Innovation [Grant 1537060], National Natural Science Foundation of China [Grant 71801148], and Shanghai Municipal Education Commission Shanghai Young Eastern Scholar Program [N.60-D129-18-202].
Keywords
- Classification
- Lasso
- Logistic regression
- Monte Carlo simulation
- Simulation analytics
- Variance reduction
ASJC Scopus subject areas
- Software
- Information Systems
- Computer Science Applications
- Management Science and Operations Research