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Short Term Financial Planning under Uncertainty

Author

Listed:
  • J. G. Kallberg

    (New York University)

  • R. W. White

    (University of Western Ontario)

  • W. T. Ziemba

    (University of British Columbia)

Abstract

This paper presents a stochastic linear programming formulation of a firm's short term financial planning problem. This framework allows a more realistic representation of the uncertainties fundamental to this problem than previous models. In addition, using Wets's algorithm for linear simple recourse problems, this formulation has approximately the same computational complexity as the mean approximation (i.e., the deterministic program obtained by replacing all random elements by their means). Using this formulation we empirically investigate the effects of differing distributions and penalty costs. We conclude that even with symmetric penalty costs and distributions the mean model is significantly inferior to the stochastic linear programming formulation. Thus we are able to demonstrate that ignoring the stochastic components in linear programming formulations can be very costly without having significant computational savings.

Suggested Citation

  • J. G. Kallberg & R. W. White & W. T. Ziemba, 1982. "Short Term Financial Planning under Uncertainty," Management Science, INFORMS, vol. 28(6), pages 670-682, June.
    • Handle: RePEc:inm:ormnsc:v:28:y:1982:i:6:p:670-682
    DOI: 10.1287/mnsc.28.6.670
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    Citations

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    Cited by:

    1. Maram Alwohaibi & Diana Roman, 2018. "ALM models based on second order stochastic dominance," Computational Management Science, Springer, vol. 15(2), pages 187-211, June.
    2. Qureshi, Saad Hassan, 2013. "Consumer Preference of Credit Vs. Debit Card," MPRA Paper 116427, University Library of Munich, Germany, revised 30 Dec 2021.
    3. Ali, Syed Babar & Umyani, Mr. Muhammad Mehdi, 2013. "Capital Structure and Financial Performance: Evidence from Pakistan," MPRA Paper 116404, University Library of Munich, Germany, revised 12 Nov 2022.
    4. John A. Buzacott & Rachel Q. Zhang, 2004. "Inventory Management with Asset-Based Financing," Management Science, INFORMS, vol. 50(9), pages 1274-1292, September.
    5. Alaeddine Faleh, 2011. "Un modèle de programmation stochastique pour l'allocation stratégique d'actifs d'un régime de retraite partiellement provisionné," Working Papers hal-00561965, HAL.
    6. Asghar, Maham, 2011. "Role of Micro Finance in Financial Inclusion," MPRA Paper 116387, University Library of Munich, Germany, revised 08 May 2022.
    7. Valeria Vannoni, 2020. "Financing Italian Firms Throught Invoice Trading Platforms," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(3), pages 1-78, March.
    8. McCarl, Bruce A., 1986. "Innovations In Programming Techniques For Risk Analysis," Regional Research Projects > 1986: S-180 Annual Meeting, March 23-26, 1986, Tampa, Florida 271825, Regional Research Projects > S-180: An Economic Analysis of Risk Management Strategies for Agricultural Production Firms.
    9. Birge, John R. & Júdice, Pedro, 2013. "Long-term bank balance sheet management: Estimation and simulation of risk-factors," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4711-4720.
    10. Oguzsoy, Cemal Berk & Guven, Sibel, 1997. "Bank asset and liability management under uncertainty," European Journal of Operational Research, Elsevier, vol. 102(3), pages 575-600, November.
    11. Ban Kawas & Aurelie Thiele, 2017. "Log-robust portfolio management with parameter ambiguity," Computational Management Science, Springer, vol. 14(2), pages 229-256, April.
    12. Kamali, Abrar Ahmed Khan, 2023. "The Customer Relationship Management Practices in Banking Industry," MPRA Paper 116552, University Library of Munich, Germany.
    13. Ul Haque, Muhammad Ebbad, 2023. "Analysis of Banker's Perception on Islamic Banking In Pakistan," MPRA Paper 116547, University Library of Munich, Germany.
    14. Ali, Madiha & Ali, Syed Babar, 2014. "The Impact of Working Capital Management on Firm Profitability and Fixed Investment in Pakistan," MPRA Paper 64520, University Library of Munich, Germany.
    15. Srinivasa Raghavan, N.R. & Mishra, Vinit Kumar, 2011. "Short-term financing in a cash-constrained supply chain," International Journal of Production Economics, Elsevier, vol. 134(2), pages 407-412, December.
    16. Amy V. Puelz, 2002. "A Stochastic Convergence Model for Portfolio Selection," Operations Research, INFORMS, vol. 50(3), pages 462-476, June.
    17. Muhammad, Usman, 2020. "Gauging the Financial Performance of Banks in Pakistan: Application of CAMEL Model," MPRA Paper 116350, University Library of Munich, Germany.
    18. Castro, Jordi, 2009. "A stochastic programming approach to cash management in banking," European Journal of Operational Research, Elsevier, vol. 192(3), pages 963-974, February.
    19. Najafi, Amir Abbas & Mushakhian, Siamak, 2015. "Multi-stage stochastic mean–semivariance–CVaR portfolio optimization under transaction costs," Applied Mathematics and Computation, Elsevier, vol. 256(C), pages 445-458.

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