Newsvendor solutions via conditional value-at-risk minimization

Newsvendor solutions via conditional value-at-risk minimization

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Article ID: iaor2009226
Country: Netherlands
Volume: 179
Issue: 1
Start Page Number: 80
End Page Number: 96
Publication Date: May 2007
Journal: European Journal of Operational Research
Authors: ,
Keywords: inventory: order policies, programming: convex
Abstract:

In this paper, we consider the minimization of the conditional value-at-risk (CVaR), a most preferable risk measure in financial risk management, in the context of the well-known single-period newsvendor problem, which is originally formulated as the maximization of the expected profit or the minimization of the expected cost. We show that downside risk measures including the CVaR are tractable in the problem due to their convexity, and consequently, under mild assumptions on the probability distribution of products' demand, we provide analytical solutions or linear programming formulation of the minimization of the CVaR measures defined with two different loss functions.

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