Optimal Purchasing Policy For Mean-Reverting Items in a Finite Horizon

Alon Dourban and Liron Yedidsion

Papers from arXiv.org

Abstract: In this research we study a finite horizon optimal purchasing problem for items with a mean reverting price process. Under this model a fixed amount of identical items are bought under a given deadline, with the objective of minimizing the cost of their purchasing price and associated holding cost. We prove that the optimal policy for minimizing the expected cost is in the form of a time-variant threshold function that defines the price region in which a purchasing decision is optimal. We construct the threshold function with a simple algorithm that is based on a dynamic programming procedure that calculates the cost function. As part of this procedure we also introduce explicit equations for the crossing time probability and the overshoot expectation of the price process with respect to the threshold function. The characteristics and dynamics of the threshold function are analyzed with respect to time, holding cost, and different parameters of the price process, and yields meaningful practical insights, as well as theoretical insights.

Date: 2017-11
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1711.03188 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1711.03188

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().