Risk Aversion in Inventory Management

Risk Aversion in Inventory Management

Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pricing str...

Optimal Inventory Control in Market-Making with Risk Aversion

Market-makers have the obligation to trade fixed amounts of assets at quoted bid or ask prices, and their inventories are exposed to the potential loss when the market price moves in an undesirable direction. One approach to reduce the risk associated with price uncertainty is to adjust the inventory at the price of losing potential spread gain. For a single-asset model, we show that a threshol...

Reservoir management with risk aversion

We consider the problem faced by a manager planning the operation of a mixed hydro/thermal system, where the manager controls the reservoir release made in each week (single reservoir), as well as the generation from other sources. Demand is deterministic and must be met in each period, while the inflows experienced in each week are uncertain. Stochastic Dynamic Programming (SDP) is a technique...

Nonparametric Risk Management and Implied Risk Aversion

Risk Averse Inventory Management∗

Traditional inventory models focus on risk neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a general framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pri...