Essays in information relaxations and scenario analysis for partially observable settings
Creators: Ruiz Lacedelli, Octavio
Publisher: name: Columbia University
Year: 2019
Subjects: Operations research
Finance
Markov processes

description: This dissertation consists of three main essays in which we study important problems in engineering and finance. 
      In the first part of this dissertation, we study the use of Information Relaxations to obtain dual bounds in the context of Partially Observable Markov Decision Processes (POMDPs). POMDPs are in general intractable problems and the best we can do is obtain suboptimal policies. To evaluate these policies, we investigate and extend the information relaxation approach developed originally for Markov Decision Processes. The use of information relaxation duality for POMDPs presents important challenges, and we show how change-of-measure arguments can be used to overcome them. As a second contribution, we show that many value function approximations for POMDPs are supersolutions. By constructing penalties from supersolutions we are able to achieve significant variance reduction when estimating the duality gap directly, and the resulting dual bounds are guaranteed to provide tighter bounds than those provided by the supersolutions themselves. Applications in robotic navigation and telecommunications are given in Chapter 2. A further application of this approach is provided in Chapter 5 in the context of personalized medicine. 
      In the second part of this dissertation, we discuss a number of weaknesses inherent in traditional scenario analysis. For instance, the standard approach to scenario analysis aims to compute the P&amp;L of a portfolio resulting from joint stresses to underlying risk factors, leaving all unstressed risk factors set to zero. This approach ignores thereby the conditional distribution of the unstressed risk factors given the stressed risk factors. We address these weaknesses by embedding the scenario analysis within a dynamic factor model for the underlying risk factors. We recur to multivariate state-space models that allow the modeling of real-world behavior of financial markets, like volatility clustering for example. Additionally, these models are sufficiently tractable to permit the computation (or simulation from) the conditional distribution of unstressed risk factors. Our approach permits the use of observable and unobservable risk factors. We provide applications to fixed income and options portfolios, where we are able to show the degree in which the two scenario analysis approaches can lead to dramatic differences. 
      In the third part, we propose a framework to study a Human-Machine interaction system within the context of financial Robo-advising. In this setting, based on risk-sensitive dynamic games, the robo-advisor adaptively learns the preferences of the investor as the investor makes decisions that optimize her risk-sensitive criterion. The investor and machine's objectives are aligned but the presence of asymmetric information makes this joint optimization process a game with strategic interactions. By considering an investor with mean-variance risk preferences we are able to reduce the game to a POMDP. The human-machine interaction protocol features a trade-off between allowing the robo-advisor to learn the investors preferences through costly communications and optimizing the investor's objective relying on outdated information.