Capital rationing problems under uncertainty and risk

Capital rationing problems under uncertainty and risk

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Article ID: iaor20122500
Volume: 51
Issue: 3
Start Page Number: 1375
End Page Number: 1396
Publication Date: Apr 2012
Journal: Computational Optimization and Applications
Authors: , ,
Keywords: allocation: resources, combinatorial optimization, stochastic processes, risk
Abstract:

Capital rationing is a major problem in managerial decision making. The classical mathematical formulation of the problem relies on a multi‐dimensional knapsack model with known input parameters. Since capital rationing is carried out in conditions where uncertainty is the rule rather than the exception, the hypothesis of deterministic data limits the applicability of deterministic formulations in real settings. This paper proposes a stochastic version of the capital rationing problem which explicitly accounts for uncertainty. In particular, a mathematical formulation is provided in the framework of stochastic programming with joint probabilistic constraints and a novel solution approach is proposed. The basic model is also extended to include specific risk measures. Preliminary computational results are presented and discussed.

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