Financial Engineering, E-commerce and Supply Chain

Financial Engineering, E-commerce and Supply Chain

Applied Optimization Volume 70 Series Editors: Panos M. Pardalos University of Florida, U.S.A. Donald Hearn University of Florida, U.S.A. The titles published in this series are listed at the end of this volume.

Financial Engineering, E-cotnmerce and Supply Chain Edited by Panos M. Pardalos University of Florida, Gainesville, Florida, U.S.A. and Vassilis K. Tsitsiringos Deal-Fx, Athens, Greece SPRJNGER-SCIENCE+BUSINESS MEDIA, B.V.

A C.I.P. Catalogue record for this book is available from the Library of Congress. ISBN 978-1-4419-5222-6 ISBN 978-1-4757-5226-7 (ebook) DOI 10.1007/978-1-4757-5226-7 Printed an acid-free paper AH Rights Reserved 2002 Springer Science+Business Media Dordrecht Originally published by Kluwer Academic Publishers in 2002 No part of this work may be reproduced, stored in a retrieval system, or transmitted in any forrn Of by any means, electronic, mechanical, photocopying, microfilming, recording or otherwise, without written permis sion from the Publisher, with the exception of any material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work.

Contents Preface xi The Threshold Accepting Heuristic for Index Tracking Manfred Gil/i, Evis Kifllezi 1.1 Introduction 2 I.2 The optimization problem 3 1.3 Implementation of theta algorithm for the index tracking problem 9 1.4 Computational results 11 1.5 Conclusions 16 2 Algorithms for Optimization of Value-at-Risk 19 Nicklas Larsen, Helmut Mausser and Stanislav Uryasev 2.1 Introduction 20 2.2 Problem statement and algorithms 22 2.3 Application of the VaR-minimization algorithms to Credit Risk 31 2.4 Analysis 35 2.5 Conclusion 40 2.6 Appendix: Bond Portfolio 4 I 3 Empirical Bayes Estimation of Securities Price Parameters Leonard C. MacLean, Michael E. Foster and William T. Ziemba 3.1 Introduction 3.2 The pricing model 3.3 The truncation estimator 3.4 Empirical test 3.5 Discussion 4 The Value of Integrative Risk Management for Insurance Products with Guarantees 59 Andrea Consiglio, Flavio Cocco and Stavros A. Zenios 4.1 Introduction 60 4.2 The traditional approach: Efficient portfolios 63 4.3 An integrative approach based on scenario optimization 65 4.4 Designing competitive policies 68 4.5 Conclusions 69 47 48 48 50 52 53 v

Vl FINANCIAL ENGINEERING, -COMMERCE AND SUPPLY CHAIN 5 4.6 Appendix: The scenario optimization model a-quantile Option in a Jump-Diffusion Economy Laura Ballotta 6 5.1 a-quantile option and Levy processes 5.2 Pricing the a-quantile option in a jump-diffusion economy 5.3 Conclusion On Optimality Condition of Interacting Agents in Financial Markets 89 Victor Korotkich 6.1 Introduction 89 6.2 On optimality condition of agents best performance 91 6.3 Representation of fitness landscapes in terms of structural complexity 92 6.4 Optimality condition of interacting agents 94 6.5 Conclusion 98 70 75 76 80 84 7 Searching for the Optimal Defence Expenditure A.S. Andreou, K.E. Parsopou/os, M.N. Vrahatis and G.A. Zombanakis 8 7.l Introduction 7.2 Literature overview 7.3 The algorithms 7.4 The model 7.5 Policy considerations 7.6 Conclusions The Efficiency of Capital Market Microstructure in Greece Harilaos V. Mertzanis 9 8.1 Introduction 8.2 The capital market microstructure 8.3 Data and econometric methodology 8.4 Empirical results 8.5 Summary and conclusions A Multiobjective Methodology for Bank Asset Liability Management K.Kosmidou, C. Zopounidis 10 9.1 Introduction 9.2 Previous research 9.3 Methodology 9.4 Analysis of results 9.5 Conclusions 9.6 Appendix Post Tax Optimal Investments Maria A. Osorio, Reuben Settergren, Here Rustem, Nalan Gulpinar I 0.1 Financial investment terminology 101 102 102 103 106 110 115 119 119 122 125 127 134 139 139 141 143 146 147 150 153 154

Contents Vll 10.2 Post tax portfolio model 10.3 Computational results 10.4 Conclusions 158 166 173 11 Random Matrix Theory and a Definition of Correlations in Financial 175 Markets Galina Korotkikh 11.1 Introduction 175 11.2 Linear correlations and problems of using variance-covariance matrix 176 11.3 Variance-covariance matrix and random matrix theory 177 11.4 Understanding properties of variance-co variances by using RMT 179 11.5 Structural correlations and symmetries in eigenvector distributions 183 11.6 Conclusion 186 12 The Simulation of the Implied Distribution and Other Smile Consistent Stochastic Volatility Models: An Overview 189 George Skiadopoulos 12.1 Introduction 189 12.2 The concept of smile consistency 191 12.3 Smile consistent stochastic volatility models 194 12.4 The simulation of the implied distribution: the general idea 199 12.5 Skiadopoulos and Hodges (2001) 201 12.6 Conclusions and topics for further research 207 13 e-comrnerce in the Agribusiness Sector: Present Situation and Future 213 Trends G. Baourakis and G. Daian 13.1 Introduction 214 13.2 Definitions 214 13.3 The initial stages ofthe electronic age in agriculture and their effects on food retail chains 215 13.4 New era of the agribusiness sector 217 13.5 e-commerce opportunities and barriers 224 13.6 e-commerce future trends 225 13.7 Conclusion 227 14 Identifying Patterns in Internet Retail Store Layouts 231 Adam P. Vrechopoulos, Georgios P. Papamichail and Georgios I. Doukidis 14.1 Introduction 232 14.2 Store atmosphere and virtual retailing dynamics 233 14.3 Research methodology 236 14.4 The results of the survey 238 14.5 Conclusions, implications and future research perspectives 240 15 A Dynamic Slope Scaling Procedure for the Fixed-Charge Cost Multi- 247 Commodity Network Flow Problem

vm FINANCIAL ENGINEERING, -COMMERCE AND SUPPLY CHAIN Sandra Duni Elqioglu, Panos M. Pardalos and H. Edwin Romeijn 15.1 15.2 15.3 15.4 15.5 15.6 Introduction Problem description and formulation A Dynamic Slope Scaling Procedure Application to a supply chain optimization problem Computational results Concluding remarks 248 250 252 256 259 267 16 Inventory Management 271 Athanasia Karakitsiou & Athanasios Migdalas 16.1 Introduction 271 16.2 Supply Chain- Supply Chain Management 272 16.3 The importance of inventories 274 16.4 Quantitative inventory models and methods 275 16.5 New trends in the inventory management- Just in Time method 287 16.6 The future of inventory management in the era of e-commerce 288 16.7 Conclusion 290 17 Non-Linear Pricing in Single Period Supply Contracts with Asymmetric 295 Demand Information Apostolos Burnetas, Stephen M. Gilbert and Craig Smith 17.1 Introduction 296 17.2 Related literature 297 17.3 The model 299 17.4 Numerical analysis 313 17.5 Conclusions and extensions 316 18 The Optimization of the Distribution System in the Context of Supply 321 Chain Management Development G. Baourakis and M. Stroe 18.1 18.2 Introduction The six dynamics of Supply Chain Management 322 325 18.3 Future trends 334 18.4 Supply Chain in agriculture - the case of Greek olive oil 334 19 From Logistics to Collaborative Logistics - a Theoretical Approach Athanasia Mavrommati & Athanasios Migda/as 19.1 Introduction 19.2 Main concept of logistics 19.3 Logistics strategy and planning 19.4 Collaborative logistics 19.5 Logistics network 19.6 Implementations of collaborative logistics 19.7 Conclusions 20 Supply Chain Management: A Business Approach to Some Actual Aspects 361 343 343 344 348 350 353 356 358

Contents IX Ines Alves de Queiroz, MSc. 20.1 20.2 20.3 20.4 20.5 20.6 Introduction Information Technology components How to reach Global SC Collaborative product commerce (CPC) Future research Conclusion 361 363 366 372 374 376 21 Failure Discrimination by Semi-Definite Programming 379 Hiroshi Konno, Jun-ya Gotoh, Stanislav Uryasev and Atsushi Yuki 21.1 Introduction 380 21.2 Mathematical formulation of hyperplane, quadratic and ellipsoidal separation 381 21.3 A cutting plane algorithm for SDP 386 21.4 Quality of discrimination 389 21.5 Concluding remarks and future direction of research 394

Preface Fueled by an explosive growth of computer and information technology, telecommunications, globalization, and extraordinary theoretical advances, Financial engineering, E- commerce and Supply Chain, have become the core activities oftoday's economies. Financial Engineering focuses upon the fundamental principles of corporate finance and investment science such as cash flow streams, arbitrage, risk aversion, pricing of firms and finance instruments, interest rate term structure, fixed income instruments duration, bond portfolio immunization, and the Markowitz mean-variance portfolio theory. One of the fastest growing elements of the Internet is electronic commerce, which refers to the use of electronic means to conduct business transactions within or across business entities. Nearly 80 percent of all Fortune 500 companies have been doing their core business through the Internet. Many issues, such as the impact of electronic commerce on the efficiency of the economy and market structure, and societal implications of electronic commerce, are the subject of recent research. A supply chain consists of all of the entities and activities that enable the production, distribution, and delivery of products and services to consumers. Research in designing and managing supply chains has rapidly expanded during the last decade. In addition, increased and accessible computing power and modeling capabilities have spurred this growth, enabling researchers to simultaneously consider the many interrelated variables and decisions of a supply chain in a single tractable model. This book contains refereed invited papers submitted at the international conference on Financial Engineering, -commerce, and Supply Chain held at Athens, Greece (May 24-27, 200 I). The conference brought together the most active researchers in computational finance, supply chain, e-commerce and related topics. In addition, many people from information technology companies xi

xn FINANCIAL ENGINEERING, -COMMERCE AND SUPPLY CHAIN and financial entrpricies participated in the conference. The conference provided a foundation for joint research cooperation, exchange of ideas among theoreticians and practitioners, and stimulation for future research. The three themes of Financial Engineering, E-Commerce, and Supply Chain pervade this book. We feel that this book will be a valuable scientific source of information to faculty, students, and researchers in finance, business, operations research, as well as for practioners in these fields. We would like to take the opportunity to thank the authors of the papers, the anonymous referees, and the sponsors for supporting this effort. Special thanks and appreciation go to S. Butenko for assisting us in the preparation of the camera ready Jb.T:EX form of this book. Finally, we would like to thank the Kluwer Academic Publishers for their assistance. P. M. Pardalos and V.K. Tsitsiringos