ESSEC Working Papers
No DR 03012:
Value at Risk and Inventory Control
Abstract: The purposes of this paper are two-fold. On the one hand,
we shall provide a decision analysis justification for the Value at Risk
(VaR) approach based on ex-post, disappointment decision making arguments.
We shall show that the approach is justified by a disappointment criterion.
In other words, the asymmetric valuation between ex-ante expected returns
above an appropriate target return and the expected returns below that same
target level, provide an explanation for the VaR criterion when it is used
as a tool for VaR efficiency design. Second, this paper provides
applications to inventory management based on VaR risk exposure. Although
the mathematical problems arising from an application of the VaR approach,
tuned to current practice in financial risk management, are difficult to
solve analytically, solutions can be found by application of standard
computational and simulation techniques. A number of cases are solved and
formulated to demonstrate the paperís applicability.
Keywords: Inventory; VaR; Disappointment; (follow links to similar papers)
JEL-Codes: C51; D24; D81; G13; (follow links to similar papers)
27 pages, November 2003
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Design Joakim Ekebom