causalities between co2 electricity and other energy variables during phase i and phase ii of the eu ets the topic of this article is the analysis of the interplay between daily carbon electricity and gas price data with the european union emission trading system eu ets for co2 emissions in a first step we have performed granger causality tests for phase i of the eu ets january 2005 until december 2007 and the first year of phase ii of the eu ets 2008 the analysis includes both spot and forward markets given the close interactions between the two sets of markets the results show that during phase i coal and gas prices through the clean dark and spark spread impacted co2 futures prices which in return granger caused electricity prices during the first year of the phase ii the short run rent capture theory in which electricity prices granger cause co2 prices prevailed on the basis of the qualitative results of the granger causality tests we obtained the formulation testable equations for quantitative analysis standard ols regressions yielded statistically robust and theoretically coherent results

offset carbon emissions or pay a price premium for avoiding them a cross country analysis of motives for climate protection activities abstractthis article contributes to the economic literature on pure and impure public goods by considering two alternatives for contributing to the public good climate protection offsetting carbon emissions from conventional consumption or paying higher prices for climate friendly products we empirically examine a wide range of motives and their impact on individuals choice in favour of these two alternatives relying on data from representative international surveys our results indicate that environmental awareness warm glow motives and the desire to set a good example have the most robust effects on both climate protection activities in germany and the united states however some motives differ considerably between both alternatives and the two countries a green identity enhances the willingness to pay a price premium for climate friendly goods or services in germany while social norms seem to be of much higher relevance in the united states our results further suggest that the choice of climate

price determination in the eu ets market theory and econometric analysis with market fundamentals abstract we investigate the price determination of the european union emission allowance eua of the european union emissions trading scheme eu ets we postulate an uncertain permit price and risk averse firms which have the possibility to hedge in the forward market the firms produce final goods abate their emissions and trade permits in the permit market the dependence of the equilibrium permit price on exogenous variables is studied in a permit market model we test our theoretical findings with empirical data from 2005 to 2010 in the eu ets market we use daily forward prices of eua as our dependent variable we use several econometric models with multiple stationary time series to discover that there is a strong relationship between the fundamentals such as german electricity prices and gas and coal prices with the price of eua we find that the eua forward price depends on fundamentals especially on the price of electricity as well as on the gas coal difference in a statistically significant way

on the integration of production and financial hedging decisions in global markets we study the integrated operational and financial hedging decisions faced by a global firm who sells to both home and foreign markets production occurs either at a single facility located in one of the markets or at two facilities one in each market the company has to invest in capacity before the selling season starts when the demand in both markets and the currency exchange rate are uncertain the currency exchange rate risk can be hedged by delaying allocation of the capacity to specific markets until both the currency and demand uncertainties are resolved and or by buying financial option contracts on the currency exchange rate when capacity commitment is made a mean variance utility function is used to model the firm s risk aversion in decision making we derive the joint optimal capacity and financial option decision and analyze the impact of the delayed allocation option and the financial options on capacity commitment and the firm s performance we show that the firm s financial hedging strategy ties closely to and can have both quantitative and qualitative impact on the firm s operational strategy the use or lack of use of financial hedges can go beyond affecting the magnitude of capacity levels by altering global supply chain structural choices such as the desired location and number of production facilities to be employed to meet global demand

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

what explains the short term dynamics of the prices of co2 emissions using the vector auto regression var and the vector error correction models vecm this paper analyzes the short term dynamics of the prices of co2 emissions in response to changes in the prices of oil coal natural gas electricity and carbon emission allowances the results show that i a positive shock to the crude oil prices has a negative effect on the co2 allowance prices ii an unexpected increase in the natural gas prices raises the price of co2 emissions iii a positive shock to the prices of the fuel of choice coal has virtually no significant impact on the co2 prices iv there is a clear positive effect of the coal prices on the co2 allowance prices when the electricity prices are excluded from the var system and v a positive shock to the electricity prices reduces the price of the co2 allowances we also find that the energy price shocks have a persistent impact on the co2 allowance prices with the largest effect occurring six months after a shock strikes the effect is particularly strong in the case of the natural gas price shocks additionally we estimate that it takes between 7 3 and 9 6 months to halve the gap between the actual and the equilibrium prices of the co2 allowances i e to erase any price over or undervaluations after a shock strikes finally the empirical findings suggest an important degree of substitution between the three primary sources of energy i e crude oil natural gas and coal particularly when electricity prices are excluded from the var system

how competitive are eu electricity markets an assessment of ets phase ii this paper studies the interactions between electricity and carbon allowance prices in the year ahead energy markets of france germany united kingdom and the nordic countries during phase ii of the eu ets var and granger causality methods are used to analyze causal interfaces whereas the volatility of electricity prices is studied with basic and asymmetric ar garch models among the main results the marginal rate at which carbon prices feed into electricity prices is shown to be ca 135 in the eex and nord pool markets where electricity and carbon prices display bidirectional causality and 109 in the uk therefore generators in these markets internalized the cost of freely allotted emission allowances into their electricity prices considerably more than the proportionate increase in costs justified by effective carbon intensity moreover electricity prices in france are found to granger cause the carbon price this study also shows how european electricity prices are deeply linked to coal prices among other factors both in terms of levels and volatility regardless of the underlying fuel mix and that coal was marginally more profitable than gas for electricity generation eu policies aimed at increasing the carbon price are likely to be crucial in limiting the externalities involved in the transition to a low carbon system

a periodic review production planning model with uncertain capacity and uncertain demand optimality of extended myopic policies increasing product complexity manufacturing environment complexity and an increased emphasis on product quality are all factors leading to uncertainties in production processes these uncertainties are in the form of unplanned machine maintenance varying production yields and rework among others in planning for production an adequate model must incorporate these uncertainties into the representation of the production process this paper treats the aggregate planning problem for a single product with random demand and random capacity in the single period problem random capacity does not affect the optimal policy but results in a unimodal nonconvex cost function in the multiple period and infinite horizon settings order up to policies that are dependent on the distribution of capacity are shown to be optimal in spite of a nonconvex cost in the infinite horizon setting an intuitive description of the situation leads to the notion of a class of extended myopic policies requiring the consideration o

the structure of periodic review policies in the presence of random yield this work provides a comprehensive analysis of a general periodic review production inventory model with random variable yield existence of an order point whose value does not depend on yield being random is proved in the single period case without specifying the yield model and using a very general cost structure when yield is a random multiple of lot size the nonorder up to optimal policy is characterized for a finite horizon model the finite horizon value functions are shown to converge to the solution of an infinite horizon functional equation and the infinite horizon order point is shown to be no smaller than when yield is certain

a utility adjusted newsvendor model with stochastic demand 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

embracing morals in economics the role of internal moral constraints in a market economy abstract economists who adhere to the assumptions of homo economicus typically focus on altering external constraints through laws or regulations as the means of eliminating bad behavior reaching the optimal solution is simply a matter of having government adjust the price of unwanted behavior through punishments or fines but adam smith highlighted the importance of another type of constraint the internal moral constraint in recent years behavioral experimental and other economists have documented that people often do not act according the assumptions of the homo economicus model and instead appear to incorporate moral constraints into their decision making process in light of this growing body of research this article argues that many economists have placed too much emphasis on external constraints and that more emphasis should be placed on internal moral constraints after discussing possible sources of internal moral constraints the paper describes how these constraints can help strengthen cooperation in the short and long run

a single period stocking and pricing problem involving stochastic emergency supply abstract we develop a model for determining jointly optimal price and production policy of products with short life cycles subject to partially uncertain supply capacity within the price setting newsvendor framework we consider that demand in excess of the stocking quantity can be met by an emergency order due to the randomness of emergency supply capacity it may not always be possible to satisfy the demand completely assuming that all customers are charged the same price we explore the optimal sourcing and pricing decisions in the commonly used additive and multiplicative demand scenarios the first order conditions imply that the optimal price in the problem with random emergency supply is less than the optimal price associated with the deterministic demand problem when demand uncertainty is additive and it is greater than the optimal price associated with the deterministic demand problem when demand uncertainty is multiplicative we also find that the same type of comparative static applies in the multiplicative uncertainty case when there exists a dual source emergency system consisting of a perfectly reliable supplier and a second supplier with a stochastic capacity

would a risk averse newsvendor order less at a higher selling price we model a risk averse newsvendor s decision making behavior with some commonly used classes of utility functions within the expected utility theory eut framework under fairly general conditions of eut we show that a risk averse newsvendor will order less than an arbitrarily small quantity as selling price gets larger if price is higher than a threshold value i e the optimal order quantity decreases as the selling price increases

on sales effort and pricing decisions under alternative risk criteria abstract in the literature different risk criteria are proposed for risk averse decision making but it is often unclear which risk criteria should be used and what their differences may be this study investigates this problem when a risk averse make to order firm decides its pricing and sales effort two factors affecting demand we consider alternative risk criteria commonly used in the literature namely expected utility theory eut mean variance mv mean semideviation ms value at risk var conditional value at risk cvar and loss aversion la we find that all of these criteria lead to similar qualitative behaviors regarding how risk loss averse decisions deviate from risk neutral ones a particularly interesting result is that the form of demand randomness i e additive or multiplicative can completely reverse the effect of risk loss aversion in certain cases we also find that the risk aversion models i e eut mv ms var and cvar are essentially equivalent in inducing the same set of optimal solutions under adverse market states however loss aversion is a mild version of risk aversion in that the la model can only lead to a subset of the solutions generated by other models these results may not be valid for other applications such as the newsvendor pricing problem so we can conclude that the relationship between alternative risk criteria is case sensitive and should be evaluated more carefully

carbon emissions trading scheme exploration in china a multi agent based model abstract to develop a low carbon economy china launched seven pilot programs for carbon emissions trading cet in 2011 and plans to establish a nationwide cet mechanism in 2015 this paper formulated a multi agent based model to investigate the impacts of different cet designs in order to find the most appropriate one for china the proposed bottom up model includes all main economic agents in a general equilibrium framework the simulation results indicate that 1 cet would effectively reduce carbon emissions with a certain negative impact on the economy 2 as for allowance allocation the grandfathering rule is relatively moderate while the benchmarking rule is more aggressive 3 as for the carbon price when the price level in the secondary cet market is regulated to be around rmb 40 per metric ton a satisfactory emission mitigation effect can be obtained 4 the penalty rate is suggested to be carefully designed to balance the economy development and mitigation effect and 5 subsidy policy for energy technology improvement can effectively reduce carbon emissions without an additional negative impact on the economy the results also indicate that the proposed novel model is a promising tool for cet policy making and analyses

the risk averse and prudent newsboy the effects of risk and risk aversion in the single period inventory newsboy problem are examined comparative static effects of changes in the various price and cost parameters are determined and related to the newsboy s risk aversion the addition of a random background wealth and of an increase in the riskiness of newspaper demand are also examined although many of the comparative effects generally are ambiguous some fairly simple restrictions on preferences and or risk increases are shown to lead to qualitatively deterministic results

adam smith and the prisoners dilemma in ordinary life we engage in many transactions with other people in which there is potential profit for both parties from some kind of cheating normally we do not see much of this cheating i have no doubt that the merchant will put in the package the merchandise which i buy or which i ordered even though if he put in something else cheaper it is quite dubious that i would be able to win a lawsuit on my part if i decide i did not like the product and returned it with the remark that it was defective having first damaged it so that it is indeed defective i could get a gain neither i nor the merchant worries particularly about this kind of behavior although the merchant worries more than i do for reasons that will become plain below if we worried about it we would both take precautions with the result that socially we would be worse off by the cost of these precautions we have here what appears to be a prisoners dilemma matrix but the two parties are behaving cooperatively what adam smith called the discipline of continuous dealings takes care of the matter the point of this article is to work out adam smith s insight in the terminology of a modern game theory we shall see that smith was right and there are some cases indeed practically very important cases where what appears to be a prisoners dilemma in fact leads to cooperative behavior consider the prisoners dilemma game shown in figure i it is orthodox that if a and b are playing a single turn of this particular game they will end up in the lower right hand corner with a net loss of one dollar each if we go from a single game to a long series of games played by the same players however there is no agreed upon solution experimental evidence seems to indicate that the players play a mixed strategy with some cooperative plays and some noncooperative plays and the mixture can be modified by changing the payoffs 2 all of these situations are simplifications of the real world and it is a point of this article to suggest that if we make the game more like many real world

price discovery and volatility spillovers in the european union emissions trading scheme a high frequency analysis abstract this paper models the relationship of european union allowance spot and futures prices within the second commitment period of the european union emissions trading scheme based on high frequency data we analyze the transmission of information in first and second conditional moments to reveal long run price discovery we compute common factor weights of schwarz and szakmary 1994 and information shares of hasbrouck 1995 based on estimated coefficients of a vecm to analyze the short run dynamics we perform granger causality tests we identify the futures market to be the leader of the long run price discovery process whereas the informational role of the futures market increases over time in addition we employ a version of the ueccc garch model as introduced by conrad and karanasos 2010 to analyze the volatility transmission structure the volatility analysis indicates a close relationship between the volatility dynamics of both markets whereas in particular we observe spillovers from the futures to the spot market as a whole the investigation reveals that the futures market incorporates information first and then transfers the information to the spot market

public choice and the economic analysis of anarchy a survey public choice economists began studying anarchy in the 1970s since then the amount of research on anarchy has burgeoned this article surveys the important public choice contributions to the economics of anarchy following early public choice economists many economists are researching how individuals interact without government from non public interested explanations of the creation of government to historical studies of internalizing externalities under anarchy public choice scholars are arriving at a more realistic perspective of human interaction with and without government although the economics of politics receives more attention the economics of anarchy is an important area of research in public choice

capacity decisions with debt financing the effects of agency problem abstract this paper studies the capacity management problem for a firm that uses debt financing this is done by analyzing the effect of the associated agency problem when making capacity decisions the agency problem arises when there are potential conflicts of interest between the firm owner and the lender we show that this agency problem can constrain the firm s optimal capacity decision because the borrowing rate will increase as the risk of default increases with capacity level chosen the firm will therefore try to optimally choose the level so as to reduce the risk of bankruptcy which the lender will take into account and as a consequence the firm will try to control the risk associated with potentially high borrowing costs however even when the expected bankruptcy cost is carefully controlled the optimal capacity decision is still made at the risk of incurring considerable agency costs in addition the corporate tax level can also play a significant role in capacity choice we show that although a higher tax rate leads to bigger tax benefit of debt and lower agency cost it also gives rise to a higher tax liability after balancing the tax benefit of debt with the agency cost the firm can make an optimal decision on the capacity level required the efficacy of financial hedging for mitigating the agency cost is also analyzed finally we compare and contrast our analysis with existing studies and it appears that we have been able to obtain a deeper insight into the problem

oil shock and economic growth in japan a nonlinear approach abstract this paper investigates the relationship between oil price shock and economic growth on the basis of the nonlinear approach developed by hamilton hamilton j 2001 a parametric approach to flexible nonlinear inference econometrica 537 573 we use the approach also in hamilton hamilton j 2003 what is an oil shock journal of econometrics 363 398 of capturing this relationship in japan in a nonlinear model the idea is that negative oil price shocks price increase tend to have larger impact on growth than positive shocks do our empirical evidence confirmed the existence of nonlinearity between these two variables and a flexible nonlinear model is estimated additionally several other form of nonlinearity are estimated and tested

politics matters regulatory events as catalysts for price formation under cap and trade this paper investigates how the political process of making cap adjustments has shaped market outcomes in the world s largest cap and trade system the eu ets capitalizing on an event study method that incorporates an econometric technique designed to handle parameter instability and model uncertainty we assess the news implied price response to 29 hand collected announcements about the eu ets supply schedule our findings document a high market responsiveness to political events and reveal how market participants view the evolution of cap stringency in the light of a particular announcement we provide evidence that a sequence of strong event induced price drops evolve in the backloading decision process which is consistent with the interpretation that market participant s confidence in the political support for reform and probably the eu ets in general has been unsettled we also document positive price reactions to the 2020 and 2030 policy packages but not the 2050 roadmaps

price drivers and structural breaks in european carbon prices 2005 2007 this article aims at characterizing the daily price fundamentals of european union allowances euas traded since 2005 as part of the emissions trading scheme ets the presence of two structural changes on april 2006 following the disclosure of 2005 verified emissions and on october 2006 following the european commission announcement of stricter phase ii allocation allows to isolate distinct fundamentals evolving overtime the results extend previous literature by showing that eua spot prices react not only to energy prices with forecast errors but also to unanticipated temperatures changes during colder events besides the sub period decomposition of the pilot phase gives a better grasp of institutional and market events that drive allowance price changes

inventory control in a fluctuating demand environment we present an inventory model where the demand rate varies with an underlying state of the world variable this variable can represent economic fluctuations or stages in the product life cycle for example we derive some basic characteristics of optimal policies and develop algorithms for computing them in addition we show that certain monotonicity patterns in the problem data are reflected in the optimal policies

carbon allowance auction design of china s emissions trading scheme a multi agent based approach in this paper a multi agent based ets simulation model is proposed for carbon allowance auction design in china in the proposed model two main agents i e the government the ets implementer and the firms in different sectors the ets targets are considered under the ets policy all agents make various decisions individually according to their own goals and interact with each other through three main markets the commodity market the primary carbon auction market and the secondary carbon trading market different popular auction designs are introduced into the ets formulation to offer helpful insights into china s ets design 1 generally the ets would lead to positive effects on china s carbon mitigation and energy structure improvement but a negative impact on economy 2 as for auction forms the uniform price design is relatively moderate while the discriminative price design is quite aggressive in both economic damage and emissions reduction 3 as for carbon price the uniform price auction might generate a slightly higher market clearing price than the discriminative price auction and the prices under two auction rules fluctuate about rmb 40 per metric ton 4 as for carbon cap the total allowances in the carbon auction market should be carefully set to well balance economic growth and mitigation effect

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 multiperiod inventory models as well as multiperiod models that coordinate inventory and pricing strategies we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk neutral inventory and pricing policies these structural results are extended to models in which the decision maker has access to a partially complete financial market and can hedge its operational risk through trading financial securities computational results demonstrate that the optimal policy is relatively insensitive to small changes in the decision maker s level of risk aversion

optimal ordering quantities for multi products with stochastic demand return cvar model abstract multi product ordering problem with stochastic demand is often optimized by the expected cost reduction or the expected profit improvement in most of previous works moreover risk preference of decision maker is often ignored evidently this approach is impracticable when the corresponding volatility is larger based on the outstanding characteristics of conditional value at risk cvar as a risk measure the paper proposes an optimal order model for multi product with cvar constraints also the model is finally formulated as a linear programming problem the model is simulated for the case of a newsvendor to analyze to what degree it succeeds the solution in fact is bound consistent fully with the decision maker s intuition on return risk decision making finally results of return cvar model and the classical model are compared and shows that return cvar model is more flexible than the classical model

dynamic multiscale interactions between european carbon and electricity markets during 2005 2016 this study explores the dynamic multiscale interactions between carbon and electricity markets during phases i 2005 2007 ii 2008 2012 and ongoing iii 2013 2016 by introducing the bivariate empirical mode decomposition bemd linear and nonlinear granger causality tests firstly bemd is used to decompose the european carbon and electricity prices into several pairs of simple modes with different timescales secondly causality tests are performed at each pair of modes with a similar timescale significant but asymmetric causalities can be found that the bidirectional linear causality turns to a unidirectional one running from the electricity price to the carbon price from phase i to phase iii whereas the nonlinear interaction enhances from insignificance to significance during the three phases the causality at short timescale is consistent with that of the original data while the causalities at mid and long timescales are more diversified the findings obtained show that the effect of carbon market on the electricity market is weakening which indicates that it is needed to increase its efficiency by raising the carbon price moreover a dynamic adjusting mechanism of emission allowances will be called for as well as the guidance aimed at different timescales in the future

influences from the european parliament on eu emissions prices abstract the decisions of the european parliament ep are shown to influence both eu emission allowance eua prices and volatility reductions in price and increases in volatility are observed when ep decisions are i not party political in origin ii made during times of low market sentiment or iii made during times of low market attention daily eua prices from 2007 to 2014 are used in the study with decisions analysed using an event study approach for price impact and a garch specification for volatility impact our findings suggest the need for policymakers to improve communication of long term strategies for the eua market this aims to reduce the evident ongoing uncertainty experienced by traders around each decision made by the ep the finding that sentiment and market attention at the time of an ep decision influences the market s reaction indicates a need to consider market dynamics in terms of decision timing so that market turbulence is not an unintended by product of an ep decision some form of medium term forward guidance may be called for

allowance price drivers in the first phase of the eu ets abstract in the first phase of the eu emissions trading scheme eu ets the price per ton of co 2 initially rose to over 30 the price then collapsed to essentially zero by mid 2007 by deriving a structural model of the allowance price under the assumption of efficient markets i examine the extent to which this variation in price can be explained by marginal abatement costs i then gradually relax the model by allowing for delayed adjustment of price to fundamentals as well as by introducing lagged lhs variables the pattern of results suggests that while prices were not initially driven by marginal abatement costs this inefficiency was largely corrected after the accounting of 2005 emissions in april 2006

supply chain network equilibrium with strategic financial hedging using futures abstract in this paper we develop a network equilibrium model for supply chain networks with strategic financial hedging we consider multiple competing firms that purchase multiple materials and parts to manufacture their products the supply chain firms procurement activities are exposed to commodity price risk and exchange rate risk the firms can use futures contracts to hedge the risks our research studies the equilibrium of the entire network where each firm optimizes its own operation and hedging decisions we use variational inequality theory to formulate the equilibrium model and provide qualitative properties we provide analytical results for a special case with duopolistic competition and use simulations to study an oligopolistic case the analytical and simulation studies reveals interesting managerial insights

non prisoner s dilemma abstract all prisoner s dilemma experiments pre select contestants prevents them from communicating and changing partners in the middle of things this brief experiment changes all three of these conditions and gets a very high degree of cooperation

modeling the price dynamics of co2 emission allowances abstract in this paper we analyze the short term spot price behavior of carbon dioxide co 2 emission allowances of the new eu wide co 2 emissions trading system eu ets after reviewing the stylized facts of this new class of assets we investigate several approaches for modeling the returns of emission allowances due to different phases of price and volatility behavior in the returns we suggest the use of markov switching and ar garch models for stochastic modeling we examine the approaches by conducting an in sample and out of sample forecasting analysis and by comparing the results to alternative approaches our findings strongly support the adequacy of the models capturing characteristics like skewness excess kurtosis and in particular different phases of volatility behavior in the returns

a multiscale analysis for carbon price drivers abstract this study proposes a multiscale analysis model to explore and identify the carbon price drivers at different timescales by introducing the latest multivariate empirical mode decomposition carbon price and its potential drivers are decomposed into several groups of simple modes with specific economic meanings the cointegration techniques error correction model and newey west estimator are combined to capture the carbon price drivers at similar timescales illustrated by the samples of the european union emissions trading system from 2009 to 2016 a few interesting results can be found that at the original data level among the three most important drivers of carbon price electricity price and stock index show positive impacts while coal price shows a negative impact at different timescales the effects of electricity and stock index appear comparatively earlier which drive carbon price from the short timescales and continue to strengthen however the impacts of coal oil and gas prices are lagging behind which respectively drive the carbon price at the medium and long timescales

causes of the eu ets price drop recession cdm renewable policies or a bit of everything new evidence the price of eu allowances euas in the eu emissions trading scheme eu ets fell from almost 30 tco2 in mid 2008 to less than 5 tco2 in mid 2013 the sharp and persistent price decline has sparked intense debates both in academia and among policy makers about the decisive allowance price drivers in this paper we examine whether and to what extent the eua price drop can be justified by three commonly identified explanatory factors the economic recession renewable policies and the use of international credits capitalizing on marginal abatement cost theory and a broadly extended data set we find that only variations in economic activity and the growth of wind and solar electricity production are robustly explaining eua price dynamics contrary to simulation based analyses our results point to moderate interaction effects between the overlapping eu ets and renewable policies the bottom line however is that 90 of the variations of eua price changes remains unexplained by the abatement related fundamentals together our findings do not support the widely held view that negative demand shocks are the main cause of the weak carbon price signal in view of the new evidence we evaluate the eu ets reform options which are currently discussed

carbon price drivers phase i versus phase ii equilibrium abstract the aim of this paper is to investigate the determinants of the carbon price during the two phases of the european union emission trading scheme eu ets more specifically relying on daily eu allowance futures contracts we test whether the carbon price drivers identified for phase i still hold for phase ii and evolve toward a long run relationship using cointegration techniques and accounting for the 2006 structural break in the carbon market we show that while a cointegrating relationship exists for both phases of the eu ets the nature of this equilibrium relationship is different across the two subperiods with an increasing role of fundamentals in phase ii deriving equilibrium values we show that the carbon price tends to be undervalued since the end of 2009

mean downside risk and mean variance newsvendor models implications for sustainable fashion retailing abstract newsvendor models have been well established for studying supply chain management problems with fashionable products in this paper we explore the mean downside risk mdr and mean variance mv newsvendor models under both the exogenous and endogenous retail price decision cases we first construct analytical models with the mdr and mv objectives we then show that the analytical solution schemes for both the mdr and mv problems are the same with the measures for sustainability such as the expected quantity of goods leftover the expected sales to expected goods leftover ratio the rate of return on investment and the probability of achieving a pre determined profit target we proceed to compare the levels of sustainability by the fashion retailers which employ the mean risk and the risk neutral models insights are generated

sequential correlated equilibria in stopping games in many situations such as trade in stock exchanges agents have many opportunities to act within a short interval of time the agents in such situations can often coordinate their actions in advance but coordination during the game consumes too much time an equilibrium in such situations has to be sequential in order to handle mistakes made by players in this paper we present a new solution concept for infinite horizon dynamic games which is appropriate for such situations a sequential normal form correlated approximate equilibrium under additional assumptions we show that every such game admits this kind of equilibrium

a benchmark solution for the risk averse newsvendor problem in this paper we derive the first order conditions for optimality for the problem of a risk averse expected utility maximizer newsvendor we use these conditions to solve a special case where the utility function is any increasing differentiable function and the random demand is uniformly distributed this special case has a simple closed form solution and therefore it provides an insightful and practical interpretation to the optimal point we show some properties of the solution and also demonstrate how it can be used for assessing the newsvendor utility function parameters

economic performance through time prize lecture to the memory of alfred nobel december 9 1993 this abstract was borrowed from another version of this item

an elasticity approach to the newsvendor with price sensitive demand we introduce a measure of elasticity of stochastic demand called the elasticity of the lost sales rate which offers a unifying perspective on the well known newsvendor with pricing problem this new concept provides a framework to characterize structural results for coordinated and uncoordinated pricing and inventory strategies concavity and submodularity of the profit function as well as sensitivity properties of the optimal inventory and price policies are characterized by monotonicity conditions or bounds on the elasticity of the lost sales rate these elasticity conditions are satisfied by most relevant demand models in the marketing and operations literature our results unify and complement previous work on price setting newsvendor models and provide a new tool for researchers modeling stochastic price sensitive demand in other contexts

economics and identity this paper considers how identity a person s sense of self affects economic outcomes we incorporate the psychology and sociology of identity into an economic model of behavior in the utility function we propose identity is associated with different social categories and how people in these categories should behave we then construct a simple game theoretic model showing how identity can affect individual interactions the paper adapts these models to gender discrimination in the workplace the economics of poverty and social exclusion and the household division of labor in each case the inclusion of identity substantively changes conclusions of previous economic analysis

a model of carbon price interactions with macroeconomic and energy dynamics abstract this paper develops a model of carbon pricing by considering two fundamental drivers of european union allowances economic activity and energy prices on the one hand economic activity is proxied by aggregated industrial production in the eu 27 as it provides the best performance in a preliminary forecasting exercise vs other indicators on the other hand brent natural gas and coal prices are selected as being the main carbon price drivers as highlighted by previous literature the interactions between the macroeconomic and energy spheres are captured in a markov switching var model with two states that is able to reproduce the boom bust business cycle hamilton 1989 first industrial production is found to impact positively negatively the carbon market during periods of economic expansion recession thereby confirming the existence of a link between the macroeconomy and the price of carbon second the brent price is confirmed to be the leader in price formation among energy markets bachmeier and griffin 2006 as it impacts other variables through the structure of the markov switching model taken together these results uncover new interactions between the recently created eu emissions market and the pre existing macroeconomic energy environment

the newsstand problem a capacitated multiple product single period inventory problem abstract practically all of the many earlier papers on the newsboy problem consider a single newsboy product with no capacity constraint this paper presents formulations and solution procedures for handling multiple newsboy type products under two cases a one resource capacity constraint and b multiple resource constraints for case a we present a necessary extension to the classical hadley whitin result for handling general demand distributions for case b we present a solution procedure that can efficiently handle the common situation where a very large number of products are involved

inventory control with an exponential utility criterion a base stock policy is shown to be optimal when a dynamic version of the news vendor model is optimized with respect to an exponential utility criterion

linear and nonlinear granger causality investigation between carbon market and crude oil market a multi scale approach abstract this paper investigates the causality between carbon market and crude oil market using a multi scale analysis approach in which two main steps are involved multi scale analysis and causality testing in multi scale analysis bivariate empirical mode decomposition bemd is employed to decompose the two series of market returns at different time scales in causality testing a linear and nonlinear integrated granger test is formulated to investigate the relationship among each pair of matched components on a similar time scale with the european union emission allowance eua futures and brent futures as study samples some interesting findings can be obtained 1 at the original data level without multi scale decomposition this study finds evidence supporting a neutrality hypothesis i e no granger causality between the carbon and crude oil markets 2 on small time scale within one week excluding non work days the two markets might be uncorrelated and driven by their own respective supply demand disequilibriums 3 for medium time scale above one week but below one year there is a strong bi directional linear and nonlinear spillover effect between the two markets due to certain extra factors with medium term effects e g significant events and policy changes 4 for long time scale the long term trends of the two markets appear an obvious linear relationship

multiscale entropy analysis of crude oil price dynamics abstract price formation in crude oil markets is the result of the action of many participants e g producers governments speculators etc whose effects are perceived at different time scales from days to years the diversity of participants as well as the occurrence of extreme socio political events yields a market with complex price evolution this paper uses entropy methods to monitor the evolution of crude oil price movements as the complexity of the price can depend of the time horizon entropy computations are performed for different time scales via low pass filtering of the price difference dynamics the results are interpreted in term of relative market efficiency concepts in the sense that high entropy values should be related to a more complex and hence less predictable market evolution it is shown that the highest market efficiency is found for small time scales up to one or two weeks the multiscale entropy pattern for high time scales longer than one quarter is interesting as it shows alternating periods of high and low entropy levels interestingly this alternating pattern has a dominant spectral component of about 4 3 years which could be related to macroeconomic kitchin business cycles it is shown that u s recessions in the recent 25 years are coincident with periods of reduced entropy levels meaning that during economic downturn the long run market complexity is drastically reduced the possible effects of extreme events e g iraq war are analyzed in terms of the relative market efficiency suggesting that some events have affected the short term but not the long term market complexity overall these results show that methods based on entropy concepts can shed light on the structure of crude oil markets as well as on its link to macroeconomic conditions and socio political extreme events

inventory models with random yield in a random environment abstract we consider a single item inventory model which is observed periodically in a randomly changing environment all model parameters are specified by the state of the environment which is assumed to be a time homogeneous markov chain yield is random due to the random capacity of the vendor i e a given order is fully received if the order quantity is less than this capacity otherwise the quantity received is equal to the available capacity the problem is analyzed in single multiple and infinite periods and it is shown that in all cases the optimal policy is the well known base stock policy where the optimal order up to level depends on the state of the environment the results are compared with the solutions of the certain yield model when there is infinite capacity we show that the order up to levels are equal in the single period case however in multiple and infinite periods we order the same or more if the yield is random

inventory control in a lost sales setting with information about supply lead times abstract supply chain collaboration using advancements in information technology is on the rise and this includes sharing of information between suppliers and buyers in this paper we study the value of information about the development of supply lead times from a buyer s perspective we consider a periodically reviewed single item inventory system in a lost sales setting where at most one order can be outstanding at a time we compare the performance of an inventory model assuming informed lead times to a model assuming uninformed independent and identically distributed lead times we employ the dynamic programming approach to find the best state dependent ordering policy to minimize the expected average total cost per time unit our numerical results show that acquiring information about the development of supply lead times is of value in general the best policy suggested by the model assuming informed lead times causes lower average cost than the model assuming uninformed lead times

eua and scer phase ii price drivers unveiling the reasons for the existence of the eua scer spread abstract this article studies the price relationships between eu emissions allowances euas valid under the eu emissions trading scheme eu ets and secondary certified emissions reductions scers established from primary cers generated through the kyoto protocol s clean development mechanism cdm given the price differences between euas and scers financial and industrial operators may benefit from arbitrage strategies by buying scers and selling euas i e selling the eua scer spread to cover their compliance position as industrial operators are allowed to use scers towards compliance with their emissions cap within the european system up to 13 4 our central results show that the spread is mainly driven by eua prices and market microstructure variables and less importantly as we would expect by emissions related fundamental drivers this might be justified by the fact that the eu ets remains the greatest source of cer demand to date

yield and allocation management in a continuous make to stock system with demand upgrade substitution abstract yield management is crucial for high tech industries to reduce over production however it is very challenging for a manufacturer to make a yield decision under the circumstance of uncertain demand and stochastic product quality for example in semiconductor manufacturing industry products are produced in batches within certain production cycle time even if the same raw material is put into the production system the product qualities measured by performance usually are not identical due to random yield in the manufacturing process since products have overlapped performance specifications products of the same batch are classified into different classes according to their qualities at the allocation stage products with higher performance can substitute for demand for products with lower performance this type of production and allocation system can be specified as a make to stock system with single material multi products multi periods upward demand substitution under random yield and uncertain demands in order to maximize profit the manufacturer needs to decide on the optimal input material quantity and the optimal allocation policy the problem is formulated as a stochastic dynamic programming model because manufacturer s profit is affected by the allocation policies atp r allocation policy is proposed to help manufacturer make real time allocation decisions a numerical experiment shows that atp r allocation policy performs better than the traditional myopic allocation policy to reduce the computation burden involved in atp r allocation policy we further propose a simplified algorithm and our experimental studies provide proof of the effectiveness of the proposed simple algorithm

reordering strategies for a newsboy type product abstract this paper considers the very common situation in which a single period newsboy type product may be ordered or produced twice during a season period we show that the explicit consideration of this reorder opportunity makes the newsboy problem very much richer the specific version considered in this paper allows a reorder during mid season after the early season demand has been observed and this reorder arrives after a given lead time the demand distributions during the various portions of the season may have very general distribution forms also the late season and early season demands may be dependent solution procedures are developed to find the best way to exploit this reorder opportunity and our numerical solutions indicate that this reorder opportunity can improve profits considerably as long as the product s profit margin is not very high other real world variations of this two order newsboy problem are briefly discussed

if homo economicus could choose his own utility function would he want one with a conscience reply in my model of the evolution of honesty 1 i assumed the existence of a signal a blush perhaps extreme values of which served to identify some individuals as being honest with certainty joseph harrington notes that without this assumption honest individuals have difficulty invading a population initially dominated by defectors for readers who do not wish to work through the algebra in his comment the argument is easily summarized in nontechnical terms suppose two honest mutants a and b arrive in an uncountably large population consisting entirely of dishonest persons and suppose that the probability that an honest person exhibits an intense blush is say 0 999 while the corresponding probability for everyone else is only 0 001 when a sees an intense blush on the face of b what will then be his estimate of the probability that b is honest assuming that a knows the laws of elementary probability and corrects for the base rate of honest persons in the population it will be zero when virtually everyone in the population is dishonest even a person with an intense blush will be pegged as dishonest provided that even the smallest fraction of dishonest persons also shows an intense blush with

factors affecting the carbon allowance market in the us the us carbon allowance market has different characteristic and price determination process from the eu ets market since emitting installations voluntarily participate in emission trading scheme this paper examines factors affecting the us carbon allowance market an autoregressive distributed lag model is used to examine the short and long run relationships between the us carbon allowance market and its determinant factors in the long run the price of coal is a main factor in the determination of carbon allowance trading in the short run on the other hand the changes in crude oil and natural gas prices as well as coal price have significant effects on carbon allowance market

the institutional environment for infrastructure investment the empirical evidence that links political institutions to economic outcomes has grown dramatically in recent years however virtually all of this analysis is undertaken using data from the past three decades this paper extends this empirical framework by performing a two century long historical analysis of the determinants of infrastructure investment in a panel of over 100 countries the results demonstrate that political environments that limit the feasibility of policy change are an important determinant of investment in infrastructure copyright 2002 oxford university press

environmental performance impacts of vendor buyer coordination abstract effective coordination is a hallmark of successful supply chain management without such coordination vendors and buyers will act independently to make decisions that optimize their own objectives e g maximize their respective profits or minimize their costs this non coordinated approach is unlikely to be optimal when one considers the supply chain as a whole most vendor buyer coordination research concentrates only on an objective of minimizing total system costs but with the increasing environmental awareness in business and the general public many organizations acknowledge that strategies and practices which incorporate environmental considerations are essential to acquire a competitive advantage the objectives of this research are concerned not only with the economic impact of vendor buyer coordination on the organizations involved but also with the wider effects on society such as the effects of pollution on the environment this research demonstrates how to effectively incorporate environmental issues into vendor buyer coordination first we study the impacts of cost minimizing vendor buyer coordination models on environmental performance when compared with independent non coordinated optimization second we develop a single vendor multi buyer coordination model that includes both costs and environmental performance measures in its objective function a numerical example and a real case study show how both the total system cost and the environmental performance can be simultaneously improved

risk spillovers across the energy and carbon markets and hedging strategies for carbon risk this study examines the risk spillovers between energy futures prices and europe based carbon futures contracts we use a markov regime switching dynamic correlation generalized autoregressive conditional heteroscedasticity ms dcc garch model in order to capture the time variations and structural breaks in the spillovers we further evaluate the optimal weights hedging effectiveness and dynamic hedging strategies for the ms dcc garch model based on both the regime dependent and regime independent optimal hedge ratios we finally complement our analysis by examining the in and out of sample hedging performances for alternative strategies our results mainly show significant volatility and time varying risk transmission from energy markets to carbon market we also find that spot and futures segments of the emission markets exhibit time varying correlations and volatile hedging effectiveness the subsample estimates show significant changes in the hedge effectiveness over the different phases of the european carbon market these results have important investment and policy implications

inventory control with information about supply conditions this paper presents an inventory control model which includes a markovian model of the supply system as that system evolves over time so do the replenishment leadtimes the optimal policy has the same structure as in standard models but its parameters change dynamically to reflect current supply conditions in this setting contrary to conventional wisdom a longer leadtime does not necessarily imply more inventory the leadtime is important but so is a concept we call order coverage

supply and demand uncertainty reduction efforts and cost comparison abstract in industries like health care consumer goods and agriculture shortages are widely observed and the consequences can be costly one of the main drivers of such shortages is the uncertain nature of supply and demand to reduce uncertainties sufficient information about supply and demand can be obtained by gathering relevant data e g auditing suppliers and conducting market research in this paper we conduct an analysis to examine the impacts of supply uncertainty demand uncertainty and uncertainty reduction efforts on production quantity and total cost we show that in the absence of uncertainty reduction efforts when the financial consequences of shortages are large or when the unit benefit is large supply uncertainty is more costly than demand uncertainty in addition exerting supply uncertainty reduction effort always causes the firm to produce fewer units than exerting demand uncertainty reduction effort although supply uncertainty reduction effort delivers a larger degree of improvement to total cost and hence is more efficient reduced supply uncertainty still leads to a higher system cost than does reduced demand uncertainty

the component procurement problem for the loss averse manufacturer with spot purchase abstract this paper studies the purchasing behaviour of a loss averse engineer to order manufacturer who purchases a key component for his final product from a supplier under a single wholesale price contract with spot purchase opportunities where both the product demand and the component spot price are uncertain through newsvendor type of models we analyze several key issues including the effects of the manufacturer s loss aversion and the effects of demand and spot price uncertainties on the manufacturer s decision behaviour we find that the purchasing behaviour of the loss averse manufacturer differs from those of the risk neutral and risk averse ones specifically we identify some sufficient conditions under which the loss averse manufacturer may purchase a larger order quantity in advance when demand becomes more uncertain or when the price becomes more uncertain we also discuss the two wholesale price contract and show that fixing the emergency supply price may lead to a smaller order quantity

the newsvendor problem review and directions for future research in this paper we review the contributions to date for analyzing the newsvendor problem our focus is on examining the specific extensions for analyzing this problem in the context of modeling customer demand supplier costs and the buyer risk profile more specifically we analyze the impact of market price marketing effort and stocking quantity on customer demand how supplier prices can serve as a coordination mechanism in a supply chain setting integrating alternative supplier pricing policies within the newsvendor framework and how the buyer s risk profile moderates the newsvendor order quantity decision for each of these areas we summarize the current literature and develop extensions finally we also propose directions for future research

newsvendor model with random supply and financial hedging utility based approach abstract this paper takes a utility based approach to the single period and single item newsvendor model unlike most models in the literature the newsvendor is not necessarily risk neutral and chooses the order quantity that maximizes the expected utility of the cash flow at the end of the period we suppose that there is uncertainty in demand as well as supply furthermore random demand and supply may be correlated with the financial markets the newsvendor exploits this correlation and manages his 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 the selection of the optimal portfolio at the same time we first use a minimum variance approach to select the portfolio the analysis results in some interesting and explicit characterizations on the structure of the optimal policy we also present numerical examples to illustrate the effects of the parameters on the optimal order quantity and the importance of financial hedging on risk reduction

optimal policies for inventory systems with finite capacity and partially observed markov modulated demand and supply processes we analyze a single item periodic review inventory system with random yield and finite capacity operating in a random environment the primary objective is to extend the model of gallego and hu 2004 to the more general case when the environment is only partially observable although our analysis is specific to inventory systems it can also be applied to production systems by replacing the fixed capacity supplier with a fixed capacity producer using sufficient statistics we consider single period multiple period and infinite period problems to show that a state dependent modified inflated base stock policy is optimal moreover we show that the multiple period cost converges to the infinite period cost as the length of the planning horizon increases

a risk averse newsvendor model under marketing dependency and price dependency abstract in this paper we analyze a single period inventory model where a risk averse newsvendor makes a joint decision on ordering pricing and marketing under the cvar risk measure criterion the newsvendor can exert marketing effort to enhance market demand we assume that the newsvendor s marketing effort affects the scale of the demand distribution and hence to model the marketing dependent demand as a multiplicative form we characterize sufficient conditions that guarantee existence and uniqueness of the optimal solutions under some mild assumptions on demand distribution expected demand function and marketing effort cost which are widely used in the related literature we show that the optimal order quantity increases in the newsvendor s marketing effort but the optimal price remains unchanged whether the demand is marketing dependent or not additionally we explore impact of exogenous parameters such as unit order cost salvage value and the newsvendor s risk aversion coefficient on the optimal decision variables and find that the optimal marketing effort always keeps the same changing direction with the optimal marketing independent order quantity as the exogenous parameters change this suggests that impact of the parameters on the optimal order quantity gets strengthened in the case of marketing dependent demand

decision bias in the newsvendor problem with a known demand distribution experimental evidence in the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand if too much is ordered stock is left over at the end of the period whereas if too little is ordered sales are lost the expected profit maximizing order quantity is well known but little is known about how managers actually make these decisions we describe two experiments that investigate newsvendor decisions across different profit conditions results from these studies demonstrate that choices systematically deviate from those that maximize expected profit subjects order too few of high profit products and too many of low profit products these results are not consistent with risk aversion risk seeking preferences prospect theory preferences waste aversion stockout aversion or the consequences of underestimating opportunity costs two explanations are consistent with the data one subjects behave as if their utility function incorporates a preference to reduce ex post inventory error the absolute difference between the chosen quantity and realized demand two subjects suffer from the anchoring and insufficient adjustment bias feedback and training did not mitigate inventory order errors we suggest techniques to improve decision making

periodic review production models with variable capacity random yield and uncertain demand we investigate a production planning problem in a periodic review environment with variable production capacity random yields and uncertain demand the implications of random yields and variable capacity for lot sizing previously have been explored separately but not jointly many production environments are likely to be subject to both types of uncertainties to minimize the total discounted expected costs production holding and shortage costs we formulate the problem as a stochastic dynamic program for the finite horizon problem we prove that the objective function is quasi convex and that the structure of the optimal policy is characterized by a single critical point for the initial stock level at each period that is if the initial stock is greater than this critical point the optimal planned production is zero otherwise it is greater than zero expressions for solving the critical point and the optimal planned production are obtained we further show that the solution for the finite horizon problem converges to that of the infinite horizon problem

structural properties of markov modulated revenue management problems abstract the admission decision is one of the fundamental categories of demand management decisions in the dynamic model of the single resource capacity control problem the distribution of demand does not explicitly depend on external conditions however in reality demand may depend on the current external environment which represents the prevailing economic financial social or other factors that affect customer behavior we formulate a markov decision process mdp to maximize expected revenues over a finite horizon that explicitly models the current environment we derive some structural results of the optimal admission policy including the existence of an environment dependent thresholds and a comparison of threshold levels in different environments we also present some computational results which illustrate these structural properties finally we extend some of the results to a related dynamic pricing formulation

multi product newsvendor problem with value at risk considerations abstract we consider the single period stochastic inventory newsvendor problem with downside risk constraints the aim in the classical newsvendor problem is maximizing the expected profit this formulation does not take into account the risk of earning less than a desired target profit or losing more than an acceptable level due to the randomness of demand we utilize value at risk var as the risk measure in a newsvendor framework and investigate the multi product newsvendor problem under a var constraint to this end we first derive the exact distribution function for the two product newsvendor problem and develop an approximation method for the profit distribution of the n product case n 2 a mathematical programming approach is used to determine the solution of the newsvendor problem with a var constraint this approach allows us to handle a wide range of cases including the correlated demand case that yields new results and insights the accuracy of the approximation method and the effects of the system parameters on the solution are investigated numerically

operational flexibility and financial hedging complements or substitutes we consider a firm that invests in capacity under demand uncertainty and thus faces two related but distinct types of risk mismatch between capacity and demand and profit variability whereas mismatch risk can be mitigated with greater operational flexibility profit variability can be reduced through financial hedging we show that the relationship between these two risk mitigating strategies depends on the type of flexibility product flexibility and financial hedging tend to be complements substitutes i e product flexibility tends to increase decrease the value of financial hedging and vice versa financial hedging tends to increase decrease the value of product flexibility when product demands are positively negatively correlated in contrast to product flexibility postponement flexibility is a substitute to financial hedging as intuitively expected although our analytical results assume perfect flexibility and perfect hedging and rely on a linear approximation of the value of hedging we validate their robustness in an extensive numerical study

risk sensitive dynamic market share attraction games we present partial results showing that risk sensitive oligopolists would spend less on advertising than would their risk neutral counterparts the model is an infinite horizon stochastic game in which each firm s goodwill is a random function of both its own and its competitors current and past advertising expenditures single period firm profits have a market share attraction form each firm seeks to maximize its expected exponential utility of the sum of discounted profits we analyze the impact that risk sensitivity and other parameters have on equilibrium advertising strategies by exploiting the special structure of the stochastic game model journal of economic literatureclassification number c73

adaptive inventory control for nonstationary demand and partial information this paper examines several different policies for an inventory control problem in which the demand process is nonstationary and partially observed the probability distribution for the demand in each period is determined by the state of a markov chain the core process however the state of this core process is not directly observed only the actual demand is observed by the decision maker given this demand process the inventory control problem is a composite state partially observed markov decision process pomdp which is an appropriate model for a number of dynamic demand problems in practice managers often use certainty equivalent control cec policies to solve such a problem however this paper presents results that demonstrate that there are other practical control policies that almost always provide much better solutions for this problem than the cec policies commonly used in practice the computational results also indicate how specific problem characteristics influence the performance of each of the alternative policies

optimal market making with risk aversion market makers have the obligation to trade any given amount 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 brought by price uncertainty is to adjust the inventory at the price of losing potential spread gain using stochastic dynamic programming we show that a threshold inventory control policy is optimal with respect to an exponential utility criterion and a mean variance trade off model symmetric and monotone properties of the threshold levels are also established

inventory management with random supply and imperfect information a hidden markov model in most of the papers on inventory models operating in a random environment the state of the environment in each period is assumed to be fully observed with perfect information however this assumption is not realistic in most real life situations and we provide a remedy in this paper by assuming that the environment is only partially observed with imperfect information we accomplish this by analyzing two formulations of single item models with periodic review and random supply in a random environment in the first one supply is random due to random capacity of production and random availability of transportation we show that state dependent base stock policy is optimal if the capacity and all costs are observed while demand and availability are unobserved in the second model we consider a model with random availability only with fixed ordering cost we show that state dependent s s policy is optimal if the availability process is observable