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Risk Neutral (risk + neutral)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting66%

Selected Abstracts

Channel Coordination for a Supply Chain with a Risk-Neutral Manufacturer and a Loss-Averse Retailer,

DECISION SCIENCES, Issue 3 2007
Charles X. Wang
ABSTRACT This articles considers a decentralized supply chain in which a single manufacturer is selling a perishable product to a single retailer facing uncertain demand. It differs from traditional supply chain contract models in two ways. First, while traditional supply chain models are based on risk neutrality, this article takes the viewpoint of behavioral principal,agency theory and assumes the manufacturer is risk neutral and the retailer is loss averse. Second, while gain/loss (GL) sharing is common in practice, there is a lack of analysis of GL-sharing contracts in the supply chain contract literature. This article investigates the role of a GL-sharing provision for mitigating the loss-aversion effect, which drives down the retailer order quantity and total supply chain profit. We analyze contracts that include GL-sharing-and-buyback (GLB) credit provisions as well as the special cases of GL contracts and buyback contracts. Our analytical and numerical results lend insight into how a manufacturer can design a contract to improve total supply chain, manufacturer, and retailer performance. In particular, we show that there exists a special class of distribution-free GLB contracts that can coordinate the supply chain and arbitrarily allocate the expected supply chain profit between the manufacturer and retailer; in contrast with other contracts, the parameter values for contracts in this class do not depend on the probability distribution of market demand. This feature is meaningful in practice because (i) the probability distribution of demand faced by a retailer is typically unknown by the manufacturer and (ii) a manufacturer can offer the same contract to multiple noncompeting retailers that differ by demand distribution and still coordinate the supply chains. [source]

Financial Frictions and Risky Corporate Debt

ECONOMIC NOTES, Issue 1 2007
Doriana Ruffino
We offer clarifications on Cooley and Quadrini (2001) regarding financial frictions and risky corporate debt pricing. Even in a frictionless world, the promised rate on corporate debt is not identical across firms and across capital structures and it is not equal to the risk-free rate. Frictions are unnecessary for credit spreads to arise. Only if the macroeconomy is in actuality risk free or risk neutral do interest rates on corporate debt reflect default probabilities. To the extent that the firm's entire financial structure is traded, a bias in credit spreads introduces an exploitable arbitrage opportunity. Re-establishing no-arbitrage, firm dynamics move in the opposite direction to Cooley and Quadrini's. [source]

Costly State Verification with Varying Risk Preferences and Liability

JOURNAL OF ECONOMIC SURVEYS, Issue 1 2006
Gaia Garino
Abstract., In the scenario of loan contracts with costly state verification, we examine how the properties of the set of states, different risk preferences of debtors and varying liability of lenders affect the structure of optimal repayments. In particular, we show that with risk-averse debtors, a general set of states, a constant observation cost and both unlimited and limited lender liability, the debtor is strictly better off revealing the true state of nature when his realized revenue is low, which implies that optimal debtor consumption has a downward jump around the single switch from observed to unobserved states. If the debtor can destroy revenue or if the debtor is risk neutral, this non-monotonicity of consumption disappears. Moreover, given the loan size, there is more monitoring under debtor-risk aversion than risk neutrality. We present simulations showing that a contract with unlimited lender liability and debtor-risk aversion has a higher expected observation cost but a lower variance of consumption than a contract with limited lender liability. Finally, we discuss the problems of commitment to verification and contract renegotiation in this framework. [source]

Nash bargaining over allocations in inventory pooling contracts

NAVAL RESEARCH LOGISTICS: AN INTERNATIONAL JOURNAL, Issue 6 2008
Eran Hanany
Abstract When facing uncertain demand, several firms may consider pooling their inventories leading to the emergence of two key contractual issues. How much should each produce or purchase for inventory purposes? How should inventory be allocated when shortages occur to some of the firms? Previously, if the allocations issue was considered, it was undertaken through evaluation of the consequences of an arbitrary priority scheme. We consider both these issues within a Nash bargaining solution (NBS) cooperative framework. The firms may not be risk neutral, hence a nontransferable utility bargaining game is defined. Thus the physical pooling mechanism itself must benefit the firms, even without any monetary transfers. The firms may be asymmetric in the sense of having different unit production costs and unit revenues. Our assumption with respect to shortage allocation is that a firm not suffering from a shortfall, will not be affected by any of the other firms' shortages. For two risk neutral firms, the NBS is shown to award priority on all inventory produced to the firm with higher ratio of unit revenue to unit production cost. Nevertheless, the arrangement is also beneficial for the other firm contributing to the total production. We provide examples of Uniform and Bernoulli demand distributions, for which the problem can be solved analytically. For firms with constant absolute risk aversion, the agreement may not award priority to any firm. Analytically solvable examples allow additional insights, e.g. that higher risk aversion can, for some problem parameters, cause an increase in the sum of quantities produced, which is not the case in a single newsvendor setting. © 2008 Wiley Periodicals, Inc. Naval Research Logistics, 2008 [source]

Coordination of Supply Chains with Risk-Averse Agents

PRODUCTION AND OPERATIONS MANAGEMENT, Issue 2 2004
Xianghua Gan
The extant supply chain management literature has not addressed the issue of coordination in supply chains involving risk-averse agents. We take up this issue and begin with defining a coordinating contract as one that results in a Pareto-optimal solution acceptable to each agent. Our definition generalizes the standard one in the risk-neutral case. We then develop coordinating contracts in three specific cases: (i) the supplier is risk neutral and the retailer maximizes his expected profit subject to a downside risk constraint; (ii) the supplier and the retailer each maximizes his own mean-variance trade-off; and (iii) the supplier and the retailer each maximizes his own expected utility. Moreover, in case (iii), we show that our contract yields the Nash Bargaining solution. In each case, we show how we can find the set of Pareto-optimal solutions, and then design a contract to achieve the solutions. We also exhibit a case in which we obtain Pareto-optimal sharing rules explicitly, and outline a procedure to obtain Pareto-optimal solutions. [source]

ON THE ROLE OF THE GROWTH OPTIMAL PORTFOLIO IN FINANCE

AUSTRALIAN ECONOMIC PAPERS, Issue 4 2005
Article first published online: 6 DEC 200, ECKHARD PLATEN
The paper discusses various roles that the growth optimal portfolio (GOP) plays in finance. For the case of a continuous market we show how the GOP can be interpreted as a fundamental building block in financial market modeling, portfolio optimisation, contingent claim pricing and risk measurement. On the basis of a portfolio selection theorem, optimal portfolios are derived. These allocate funds into the GOP and the savings account. A risk aversion coefficient is introduced, controlling the amount invested in the savings account, which allows to characterize portfolio strategies that maximise expected utilities. Natural conditions are formulated under which the GOP appears as the market portfolio. A derivation of the intertemporal capital asset pricing model is given without relying on Markovianity, equilibrium arguments or utility functions. Fair contingent claim pricing, with the GOP as numeraire portfolio, is shown to generalise risk neutral and actuarial pricing. Finally, the GOP is described in various ways as the best performing portfolio. [source]