Learning about profitability and dynamic cash management

Décamps, Jean‐Paul; Villeneuve, Stéphane

doi:10.1016/j.jet.2022.105522

Journal of Economic Theory

2022

DOI: 10.1016/j.jet.2022.105522

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Learning about profitability and dynamic cash management

Jean‐Paul Décamps

Stéphane Villeneuve

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Cited by 3 publications

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“…From the point of view of its application, even though the literature on the optimal management of inventory is extremely rich, as already discussed, there is no model where the demand is assumed to be partially observed and lump-sum and singularly continuous actions on the inventory are allowed. From the mathematical theory perspective, the literature on the optimal policy characterization in singular stochastic control problems with partial observation is limited and actually deals only with monotone controls [4,12,15,35]. On the contrary, we allow the decision maker to both decrease and increase the underlying process by using controls of bounded-variation.…”

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confidence: 99%

Two-Sided Singular Control of an Inventory with Unknown Demand Trend

Federico,

Ferrari,

Rodosthenous

2023

SIAM J. Control Optim.

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We study the problem of optimally managing an inventory with unknown demand trend. Our formulation leads to a stochastic control problem under partial observation, in which a Brownian motion with nonobservable drift can be singularly controlled in both an upward and downward direction. We first derive the equivalent separated problem under full information, with state-space components given by the Brownian motion and the filtering estimate of its unknown drift, and we then completely solve this latter problem. Our approach uses the transition among three different but equivalent problem formulations, links between two-dimensional bounded-variation stochastic control problems and games of optimal stopping, and probabilistic methods in combination with refined viscosity theory arguments. We show substantial regularity of (a transformed version of) the value function, we construct an optimal control rule, and we show that the free boundaries delineating (transformed) action and inaction regions are bounded globally Lipschitz continuous functions. To our knowledge this is the first time that such a problem has been solved in the literature.

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mentioning

confidence: 99%

Two-Sided Singular Control of an Inventory with Unknown Demand Trend

Federico,

Ferrari,

Rodosthenous

2023

SIAM J. Control Optim.

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Optimal execution with multiplicative price impact and incomplete information on the return

Felix

Ferrari

2023

Finance Stoch

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We study an optimal liquidation problem with multiplicative price impact in which the trend of the asset price is an unobservable Bernoulli random variable. The investor aims at selling over an infinite time horizon a fixed amount of assets in order to maximise a net expected profit functional, and lump-sum as well as singularly continuous actions are allowed. Our mathematical modelling leads to a singular stochastic control problem featuring a finite-fuel constraint and partial observation. We provide a complete analysis of an equivalent three-dimensional degenerate problem under full information, whose state process is composed of the asset price dynamics, the amount of available assets in the portfolio, and the investor’s belief about the true value of the asset’s trend. Its value function and optimal execution rule are expressed in terms of the solution to a truly two-dimensional optimal stopping problem, whose associated belief-dependent free boundary $b$ b triggers the investor’s optimal selling rule. The curve $b$ b is uniquely determined through a nonlinear integral equation, for which we derive a numerical solution through an application of the Monte Carlo method. This allows us to understand the value of information in our model as well as the sensitivity of the problem’s solution with respect to the relevant model parameters.

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The Relationship between Integrated Thinking and Financial Risk: Panel Estimation in a Global Sample

Radu

Dragomir

2022

Risks

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There is a growing interest in identifying the benefits that companies may have once they disclose financial and sustainability information in integrated reports. The aim of this study is to analyze the relationship between integrated thinking and reporting (ITR) and financial risk in nonfinancial companies worldwide. Data were collected mainly from the Refinitiv Eikon database for 7111 companies from 85 countries over the period 2017–2021. The focal industries are basic materials, consumer discretionary, consumer staples, energy, healthcare, industrials, real estate, technology, telecommunications, and utilities. Panel regression was used as a statistical procedure and random effects models are preferred. Hypotheses related to signaling theory are confirmed, as companies are interested in high-quality disclosures in integrated reports, reflecting a positive outlook and reduced financial risk. Our results show a negative relationship between ITR and the weighted average cost of capital, and a positive association between the main predictor and liquidity measured by the cash ratio. In addition, designing a compensation system linked to sustainability performance leads to a reduced cost of financing through debt and equity. Robustness tests were applied to the relationship between ITR and the weighted average cost of capital; the results show that stricter board oversight and holistic stakeholder management can decrease the average cost of capital and the financial risk for the company. This research is important for stakeholders looking to improve their knowledge about integrated reports and for practitioners seeking to enhance the quality of integrated reports and reduce the financial risk of companies.

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Learning about profitability and dynamic cash management

Cited by 3 publications

References 52 publications

Two-Sided Singular Control of an Inventory with Unknown Demand Trend

Two-Sided Singular Control of an Inventory with Unknown Demand Trend

Optimal execution with multiplicative price impact and incomplete information on the return

The Relationship between Integrated Thinking and Financial Risk: Panel Estimation in a Global Sample

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