Final version in European Journal of Operational Research
30 Pages Posted: 9 Dec 2011 Last revised: 31 Jan 2012
Date Written: December 7, 2011
We consider the problem of determining the minimal requirement one must establish in order to meet a series of future random payments. It is shown in a very general setting that this problem can be recast as a chance constrained model and how the technique of Sample Average Approximation can be employed to find solutions. We also use comonotonic theory to analyze analytical approximations in a restricted Gaussian setting. Our numerical illustrations demonstrate that the Sample Average Approximation is a viable and effcient way to solve the stated problem generally and outperforms the analytical approximations. In passing we present a result that is related to Stein's famous lemma (Stein, 1981) and is of interest in itself.
Keywords: Risk management, Solvency, Comonotonicity, Sample Average Approximation
Suggested Citation: Suggested Citation
Pagnoncelli, Bernardo and Vanduffel, Steven, A Provisioning Problem with Stochastic Payments (December 7, 2011). Final version in European Journal of Operational Research. Available at SSRN: https://ssrn.com/abstract=1969601 or http://dx.doi.org/10.2139/ssrn.1969601