superquantile regression with …dinamico2.unibg.it/icsp2013/doc/ps/4.miranda.pdfsuperquantile...
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SUPERQUANTILE REGRESSION WITH APPLICATIONS TO
BUFFERED RELIABILITY, UNCERTAINTY QUANTIFICATION,
AND CONDITIONAL VALUE-AT-RISK
INTERNATIONAL CONFERENCE ON STOCHASTIC PROGRAMMING
Sofia Miranda
Portuguese Navy, Lisbon, Portugal
Naval Postgraduate School, Monterey, CA
with Johannes O. Royset
Naval Postgraduate School, Monterey, CA
and R. T. Rockafellar
University of Washington, Seattle, WA
BERGAMO, 11 JULY 2013
This material is based upon work supported in part by the U.S. Air Force Office of
Scientific Research under grants FA9550-11-1-0206 and F1ATAO1194GOO1.
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• Introduction
• Fundamental Risk Quadrangle
• Least-Squares Regression
• Quantile Regression
• Superquantile Regression
• Validation Analysis
• Computational Methods
• Numerical Examples
AGENDA
2
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• Superquantile
Also known as…
• conditional value-at-risk
• average value-at-risk
• expected shortfall
Coherent [1], regular [2], convex [3] risk measure
Accounts for tail behavior (risk-averseness)
BACKGROUND
3
[1] P. Artzner, F. Delbaen, J.-M. Eber, and D. Heath. Coherent measures of risk. Mathematical
Finance, 9:201-227, 1999.
[2] R.T. Rockafellar and S. Uryasev, “The fundamental risk quadrangle in risk management,
optimization and statistical estimation,” Surveys in Operations Research and Management
Science, 18:33–53, 2013.
[3] A. Ruszczynski and A. Shapiro. Optimization of convex risk functions. Mathematics of
Operations Research, 31(3):433-452, 2006.
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-quantile = min | ( )Yq Y y F y
1
-superquantile =
1 ( )
1
q Y
q Y d
E Y
4
BACKGROUND
Cost / Loss / Damage
Den
sity
max Y
1
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• Cost / Loss / Damage random variable Y
Incomplete information about random variable Y
(e.g., unknown probability distribution, mean and
other relevant statistics)
Beneficial to approximate loss random variable Y
in terms of an n-dimensional explanatory random
vector X that is more accessible
MOTIVATION
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Naturally we think…
… Least-squares regression:
estimate the conditional expectation of the loss
random variable Y.
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MOTIVATION
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Naturally we think…
… Least-squares regression:
estimate the conditional expectation of the loss
random variable Y.
But what if…
… the decision maker is risk averse, i.e., more
concerned about upper-tail realizations of Y
… and sees errors asymetrically, i.e.,
UNDERESTIMATING losses being more
DETRIMENTAL than overestimating
MOTIVATION
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An alternative…
… Quantile regression:
accomodates risk-averseness and a asymmetric
view of errors by estimating conditional quantiles
at a probability level.
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MOTIVATION
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An alternative…
… Quantile regression:
accomodates risk-averseness and a asymmetric
view of errors by estimating conditional quantiles
at a probability level.
But…
… quantile is not a coherent measure of risk.
… quantiles cause computational challenges
when incorporated into optimization problems.
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MOTIVATION
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MOTIVATION
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MOTIVATION
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MOTIVATION
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MOTIVATION
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MOTIVATION
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MOTIVATION
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MOTIVATION
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MOTIVATION
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MOTIVATION
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MOTIVATION
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Superquantile tracking
•
•
•
Surrogate estimation
•
•
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MOTIVATION
Focus on the conditional ( ) ( | ) for
Minimize ( ) by choice of min ( )
Given data of realizations of ( ), build approximating
model of ( ) as function of
n
x
Y x Y X x x
Y x x q Y x
Y x
q Y x x
Explanatory random vector beyond our control
Select function s.t. ( ) serves as surrogate for
X
f f X Y
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MOTIVATION
Superquantile weighs the data above and below
the given probability level α
(magnitude of the errors are important)
We develop Superquantile regression.
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FUNDAMENTAL RISK QUADRANGLE
risk deviation
regret
erro
r
12
[3] R.T. Rockafellar and S. Uryasev, “The fundamental risk quadrangle in risk management,
optimization and statistical estimation,” Surveys in Operations Research and Management
Science, 18:33–53, 2013.
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0
0
0 0
0
arg min
statist
( )
( ) arg min ( )
ic C
C
C Y C
YY C
0
0
0 0
0
( ) min ( )
( ) min ( )
C
C
Y C Y C
Y Y C
FUNDAMENTAL RISK QUADRANGLE
13
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0
0
0 0
0
arg min
statist
( )
( ) arg min ( )
ic C
C
C Y C
YY C
0
0
0 0
0
( ) min ( )
( ) min ( )
C
C
Y C Y C
Y Y C
FUNDAMENTAL RISK QUADRANGLE
13
What error measure should we minimize so that
we get a specific statistic?...
… Say expectation?
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LEAST-SQUARES REGRESSION
• Risk quadrangle (variance version)
14
2
0 0 2
Y E Y
Y C Y C
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LEAST-SQUARES REGRESSION
• Risk quadrangle (variance version)
14
2
0 0 2
Y E Y
Y C Y C
Least-squares regression obtained when we minimize
the corresponding error measure
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QUANTILE REGRESSION
• Risk quadrangle
15
0 0 0
1max ,0 max ,0
1
Y
Y C E Y C Y C
q Y
For a given probability level (0,1)
[4] R. Koenker. Quantile Regression. Econometric Society Monographs, 2005.
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QUANTILE REGRESSION
• Risk quadrangle
15
0 0 0
1max ,0 max ,0
1
Y
Y C E Y C Y C
q Y
For a given probability level (0,1)
Quantile regression obtained when we minimize
the corresponding error measure
(the Koenker-Bassett error)
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SUPERQUANTILE REGRESSION
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What error measure should we minimize so that
we get the SUPERQUANTILE as the
STATISTIC?...
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0 0 0
0 0
1
0
1max 0 ), (
1
Y C Y C C
Y C q Y C
Y q Y
Y q Y q Y
E Y
d
Y q Y
Y q Y E Y
Superquantile-based quadrangle
• Risk quadrangle
Superquantile
error measure
17
SUPERQUANTILE REGRESSION
For a given probability level (0,1)
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• Assumptions on loss random variable Y:
(Y has a finite second moment)
2 2( ) : { : | [ ] }Y Y E Y
SUPERQUANTILE REGRESSION
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• Superquantile regression problem
Before…
We want to go beyond class of constant functions
and utilize connection with underlying
explanatory random vector X
Regression functions of the form
for given ‘basis’ functions
0
0 min C
Y C
19
SUPERQUANTILE REGRESSION
0 0( ) , ( ) , with , ,mf x C C h x C C
: n mh
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0
0,
0 0
: min ( , )
where ( : )
, ) , (
mC CP Z C C
Z C C Y C C h X
Superquantile regression problem:
is the error random variable.
: (0,1)For any ,and n mh
1
0
set of optimal solution
( , ) reg
s of
ression ve
ctor
m P
C C
SUPERQUANTILE REGRESSION
20
1
0 0 0
0
1( , ) max 0, ( , ) ( , )
1Z C C q Z C C d E Z C C
convex
optimization
problem
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SUPERQUANTILE REGRESSION
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Consistency
Distribution of (X,Y) rarely available
(e.g., empirical distribution generated by sample)
random vector whose joint
distribution approximates that of ,
number observati
( , )
ons
X
Y
Y
X
CONSISTENCY
0 0( , ) : , ( )Z C C Y C C h X 22
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• Superquantile regression problem
Approximate superquantile regression problem
(incomplete distributional information)
Recall:
0
0,
: min ( , )mC C
P Z C C
0
0,
: min ( , )mC C
P Z C C
0 0( , ) : , ( )Z C C Y C C h X
SUPERQUANTILE REGRESSION
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Suppose ( , ) ( , ) then:dX Y X Y
• Theorem
0 1If {( , )} is sequence of optimal solutions
of , then every accumulation
point of that sequence is a regression vector of .
C C
P
P
SUPERQUANTILE REGRESSION
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1
0
1
Fix ( , )
( (·,·)) ( (·,·)) converges
pointwise on
( (·,·)) and ( (·,
abritrarily.
.
are finite and
convex functi
·))
( (·,·)) epiconverges to ( (·,·))
convergence of opti
on
ma
s
l
m
m
C C
Z Z
Z Z
Z Z
solutions
• Proof
SUPERQUANTILE REGRESSION
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• Proposition
The set of regression vectors of
is equivalently obtained as
C P
26
0
0,
: min ( , )mC C
P Z C C
0
0 0
: min ( )
and set ( ( ))
mCD Z C
C q Z C
0( ) , ( ) .where Z C Y C h X
ALTERNATIVE PROBLEM
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• Proposition
The set of regression vectors of
is equivalently obtained as
C P
26
0
0,
: min ( , )mC C
P Z C C
0
0 0
: min ( )
and set ( ( ))
mCD Z C
C q Z C
0( ) , ( ) .where Z C Y C h X
ALTERNATIVE PROBLEM
1
0
0
0
1max 0, ( , )
1
( , )
q Z C C d
E Z C C
1
0
0
1( )
1
( )
q Z C d
E Z C
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• Coefficient of determination
Least-squares regression
2
2 Res
2
T
Res
T
0
1 1 1,
where
= residual sum of squares error measure
= total sum of squares deviation measu e
,
r
ESS
Y C C h
RSS
SS
S
X
S
Y
VALIDATION ANALYSIS
0( ( , ))Z C C
( )Y
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VALIDATION ANALYSIS
• Coefficient of determination
Superquantile regression
0
02 , : 1,Y C C h X
R C CY
0 0
2
0 0, ,
arg min , arg max ,C C C C
Y C C h X R C C
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COMPUTATIONAL METHODS
• Optimization problem we need to solve:
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0
0 0
0
1
0
: min ( )
1
1 min ( ( )) ( )
and set ( ( ))
m
m
C
C
D Z C
q Z C d Z CE
C q Z C
0( ) , ( ) .where Z C Y C h X
Approximate problem with observations: D
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COMPUTATIONAL METHODS
• Analytical integration
Numerical integration can be avoided by expense
of additional variables
Partition integral over
in D
We obtain a LP involving
1 1 variables
and 2 inequality constraints,
where .
m
30
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• Numerical integration
0 1 1
,
0 0
1
[ ,1] subintervals,
where 1.
0, 0,..., .
Approximation of
Divide interval into
Weigh each o
1: min ( ( )) ( )
1
Larg
ne by it
e-scale LP
s wei
w
ght
i
:
m i
i
iC
i
w i
D
D w q Z C E Z C
th 2 variables
and 2 constraints
m
COMPUTATIONAL METHODS
31
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[5] Inc. American Optimal Decisions. Portfolio Safeguard (PSG) in Windows Shell
Environment: Basic Principles. AORDA, Gainesville, FL, 2011.
• Investment analysis (I)
Y is the negative return of the Fidelity Magellan
Fund
Explanatory variables:
RLG (Russel 1000 Growth Index)
RLV (Russel 1000 Value Index)
RUJ (Russel Value Index)
and RUO (Russel 2000 Growth Index)
32
NUMERICAL EXAMPLES
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• Investment analysis (I)
Y is the negative return of the Fidelity Magellan
Fund
Explanatory variables:
RLG (Russel 1000 Growth Index)
RLV (Russel 1000 Value Index)
RUJ (Russel Value Index)
and RUO (Russel 2000 Growth Index)
32
NUMERICAL EXAMPLES
X
[5] Inc. American Optimal Decisions. Portfolio Safeguard (PSG) in Windows Shell
Environment: Basic Principles. AORDA, Gainesville, FL, 2011.
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NUMERICAL EXAMPLES
33
2
0.90
0.90
( ) 0.0475 1.0727
0.5702
f x x
R
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• Investment analysis (II)
Explanatory variables:
RLG (Russel 1000 Growth Index)
RLV (Russel 1000 Value Index)
RUJ (Russel Value Index)
and RUO (Russel 2000 Growth Index)
34
NUMERICAL EXAMPLES
1
2
3
4
X
X
X
X
1 2 3 4
2
0.90
( ) 0.0138 0.4837 0.4912 0.0223 0.0019
0.8722
f x x x x x
R
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QUESTIONS ?
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REFERENCES
[1] R.T. Rockafellar and J.O. Royset, “Random variables, monotone
relations, and convex analysis,” Mathematical Programming B, accepted.
[2] R.T. Rockafellar, J.O. Royset, and S.I. Miranda, “Superquantile
regression with applications to buffered reliability, uncertainty
quantification, and conditional value-at-risk,” in review.
[3] R.T. Rockafellar and J.O. Royset, “Superquantiles and their applications
to risk, random variables, and regression,” INFORMS Tutorials,
INFORMS, 2013.
[4] R.T. Rockafellar and S. Uryasev, “The fundamental risk quadrangle in
risk management, optimization and statistical estimation,” Surveys in
Operations Research and Management Science, 18:33–53, 2013.
[5] R. T. Rockafellar, S. Uryasev, and M. Zabarankin. Risk tuning with
generalized linear regression. Mathematics of Operations Research,
33(3):712–729, 2008.