Optimal dynamic procurement policies for a storable commodity with Lévy prices and convex holding costs

Maria B. Chiarolla, Giorgio Ferrari and Gabriele Stabile

European Journal of Operational Research, 2015, vol. 247, issue 3, 847-858

Abstract: In this paper we study a continuous time stochastic inventory model for a commodity traded in the spot market and whose supply purchase is affected by price and demand uncertainty. A firm aims at meeting a random demand of the commodity at a random time by maximizing total expected profits. We model the firm’s optimal procurement problem as a singular stochastic control problem in which controls are nondecreasing processes and represent the cumulative investment made by the firm in the spot market (a so-called stochastic ‘monotone follower problem’). We assume a general exponential Lévy process for the commodity’s spot price, rather than the commonly used geometric Brownian motion, and general convex holding costs.

Keywords: Continuous time inventory; Lévy price process; Monotone follower problem; First order conditions for optimality; Base inventory level (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Optimal Dynamic Procurement Policies for a Storable Commodity with L\'evy Prices and Convex Holding Costs (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:247:y:2015:i:3:p:847-858

DOI: 10.1016/j.ejor.2015.06.061

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