A utility adjusted newsvendor model with stochastic demand

Alavi Fard, F, He, J, Ivanov, D and Jie, F 2019, 'A utility adjusted newsvendor model with stochastic demand', International Journal of Production Economics, vol. 211, pp. 154-165.


Document type: Journal Article
Collection: Journal Articles

Title A utility adjusted newsvendor model with stochastic demand
Author(s) Alavi Fard, F
He, J
Ivanov, D
Jie, F
Year 2019
Journal name International Journal of Production Economics
Volume number 211
Start page 154
End page 165
Total pages 12
Publisher Elsevier BV
Abstract We develop a continuous time Newsvendor model to determine the optimal inventory level for commodities in an established financial market. Unlike most models in literature, the newsvendor is not necessarily risk-neutral and chooses the order quantity that maximises the expected utility of the cash flow at the end of the period. The newsvendor exploits the correlation between stochastic demand and the price of the commodities, in order to manage risks by investing in a portfolio of financial instruments. The decision problem, therefore, includes not only the determination of the optimal ordering policy, but also, at the same time, the selection of a portfolio that maximises her utility. Further, we demonstrate that our model, compared to a myopic approach (i.e. no hedging), requires significantly lower levels of inventory buffer to mitigate demand uncertainty, thus better utilising capital.
Subject Economics not elsewhere classified
Keyword(s) Inventory control
Newsvendor model
Real option
Stochastic demand
Stochastic optimisation
DOI - identifier 10.1016/j.ijpe.2019.01.018
Copyright notice © 2019 Elsevier BV
ISSN 0925-5273
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