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Article: Optimal inventory policy with fixed and proportional transaction costs under a risk constraint

TitleOptimal inventory policy with fixed and proportional transaction costs under a risk constraint
Authors
KeywordsHjb-Equation
Optimal Portfolios
Risk-Constrained Inventory Policy
Value-At-Risk
Issue Date2013
PublisherPergamon. The Journal's web site is located at http://www.elsevier.com/locate/mcm
Citation
Mathematical And Computer Modelling, 2013, v. 58 n. 9-10, p. 1595-1614 How to Cite?
AbstractThe traditional inventory models focus on characterizing replenishment policies in order to maximize the total expected profit or to minimize the expected total cost over a planned horizon. However, for many companies, total inventory costs could be accounting for a fairly large amount of invested capital. In particular, raw material inventories should be viewed as a type of invested asset for a manufacturer with suitable risk control. This paper is intended to provide this perspective on inventory management that treats inventory problems within a wider context of financial risk management. In view of this, the optimal inventory problem under a VaR constraint is studied. The financial portfolio theory has been used to model the dynamics of inventories. A diverse portfolio consists of raw material inventories, which involve market risk because of price fluctuations as well as a risk-free bank account. The value-at-risk measure is applied thereto to control the inventory portfolio's risk. The objective function is to maximize the utility of total portfolio value. In this model, the ordering cost is assumed to be fixed and the selling cost is proportional to the value. The inventory control problem is thus formulated as a continuous stochastic optimal control problem with fixed and proportional transaction costs under a continuous value-at-risk (VaR) constraint. The optimal inventory policies are derived by using stochastic optimal control theory and the optimal inventory level is reviewed and adjusted continuously. A numerical algorithm is proposed and the results illustrate how the raw material price, inventory level and VaR constraint are interrelated. © 2012.
Persistent Identifierhttp://hdl.handle.net/10722/155958
ISSN
2015 Impact Factor: 1.366
2015 SCImago Journal Rankings: 0.643
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorWang, SYen_US
dc.contributor.authorYiu, KFCen_US
dc.contributor.authorMak, KLen_US
dc.date.accessioned2012-08-08T08:38:37Z-
dc.date.available2012-08-08T08:38:37Z-
dc.date.issued2013en_US
dc.identifier.citationMathematical And Computer Modelling, 2013, v. 58 n. 9-10, p. 1595-1614en_US
dc.identifier.issn0895-7177en_US
dc.identifier.urihttp://hdl.handle.net/10722/155958-
dc.description.abstractThe traditional inventory models focus on characterizing replenishment policies in order to maximize the total expected profit or to minimize the expected total cost over a planned horizon. However, for many companies, total inventory costs could be accounting for a fairly large amount of invested capital. In particular, raw material inventories should be viewed as a type of invested asset for a manufacturer with suitable risk control. This paper is intended to provide this perspective on inventory management that treats inventory problems within a wider context of financial risk management. In view of this, the optimal inventory problem under a VaR constraint is studied. The financial portfolio theory has been used to model the dynamics of inventories. A diverse portfolio consists of raw material inventories, which involve market risk because of price fluctuations as well as a risk-free bank account. The value-at-risk measure is applied thereto to control the inventory portfolio's risk. The objective function is to maximize the utility of total portfolio value. In this model, the ordering cost is assumed to be fixed and the selling cost is proportional to the value. The inventory control problem is thus formulated as a continuous stochastic optimal control problem with fixed and proportional transaction costs under a continuous value-at-risk (VaR) constraint. The optimal inventory policies are derived by using stochastic optimal control theory and the optimal inventory level is reviewed and adjusted continuously. A numerical algorithm is proposed and the results illustrate how the raw material price, inventory level and VaR constraint are interrelated. © 2012.en_US
dc.languageengen_US
dc.publisherPergamon. The Journal's web site is located at http://www.elsevier.com/locate/mcmen_US
dc.relation.ispartofMathematical and Computer Modellingen_US
dc.subjectHjb-Equationen_US
dc.subjectOptimal Portfoliosen_US
dc.subjectRisk-Constrained Inventory Policyen_US
dc.subjectValue-At-Risken_US
dc.titleOptimal inventory policy with fixed and proportional transaction costs under a risk constrainten_US
dc.typeArticleen_US
dc.identifier.emailYiu, KFC:cedric@hkucc.hku.hken_US
dc.identifier.authorityYiu, KFC=rp00206en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1016/j.mcm.2012.03.009en_US
dc.identifier.scopuseid_2-s2.0-84883560367en_US
dc.identifier.isiWOS:000325306700003-
dc.publisher.placeUnited Kingdomen_US
dc.identifier.scopusauthoridWang, SY=25654281500en_US
dc.identifier.scopusauthoridYiu, KFC=24802813000en_US
dc.identifier.scopusauthoridMak, KL=55175483100en_US
dc.identifier.citeulike10518355-

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