An approximation scheme for stochastic programs with secondorder dominance constraints

Yongchao  Liu; Hailin   Sun; Huifu  Xu

doi:10.3934/naco.2016021

Article Contents

2016, Volume 6, Issue 4: 473-490. Doi: 10.3934/naco.2016021

This issue Previous Article Solving higher index DAE optimal control problems Next Article 2D system analysis via dual problems and polynomial matrix inequalities

An approximation scheme for stochastic programs with second order dominance constraints

1.
Department of Mathematics, Dalian Maritime University, Dalian 116026
2.
School of Economics and Management, Nanjing University of Science and Techonolyogy, Nanjing, 210049
3.
School of Mathematics, University of Southampton, SO17 1BJ, Southampton

Received: September 2015

Revised: November 2016

Published: November 2016

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Abstract

It is well known that second order dominance relation between two random variables can be described by a system of stochastic semi-infinite inequalities indexed by $\mathcal R$, the set of all real number. In this paper, we show the index set can be reduced to the support set of the dominated random variable strengthening a similar result established by Dentcheva and Ruszczyński [9] for discrete random variables. Viewing the semi-infinite constraints as an extreme robust risk measure, we relax it by replacing it with entropic risk measure and regarding the latter as an approximation of the former in an optimization problem with second order dominance constraints. To solve the entropic approximation problem, we apply the well known sample average approximation method to discretize it. Detailed analysis is given to quantify both the entropic approximation and sample average approximation for various statistical quantities including the optimal value, the optimal solutions and the stationary points obtained from solving the sample average approximated problem. The numerical scheme provides an alternative to the mainstream numerical methods for this important class of stochastic programs.

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Mathematics Subject Classification: Primary: 90C15, 90C31.

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