Scenario tree modelling for multistage stochastic programs

Holger Heitsch , Werner Römisch

Preprint series: Institut für Mathematik, Humboldt-Universität zu Berlin (ISSN 0863-0976),

MSC 2000

90C15 Stochastic programming

Abstract
An important issue for solving multistage stochastic programs consists in the approximate representation of the (multivariate) stochastic input process in the form of a scenario tree. In this paper, forward and backward approaches are developed for generating scenario trees out of an initial fan of individual scenarios. Both approaches are motivated by the recent stability result in [15] for optimal values of multistage stochastic programs. They are based on upper bounds for the two relevant ingredients of the stability estimate, namely, the probabilistic and the filtration distance, respectively. These bounds allow to control the process of recursive scenario reduction [13] and branching. Numerical experience is reported for constructing multivariate scenario trees in electricity portfolio management.