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Three Asset Cash Balance and Dynamic Portfolio Problems

Author

Listed:
  • Gary D. Eppen

    (University of Chicago)

  • Eugene F. Fama

    (University of Chicago)

Abstract

This paper describes the form of the optimal operating policy for a three asset cash balance problem in which (1) holding and penalty costs are proportional to the level of the cash balance, (2) the costs incurred in transferring funds between cash and earning assets are proportional to the amount of funds transferred, and (3) inflows and outflows of cash are to some extent random. There are assumed to be two earning assets, called "bonds" and "stock," that can be used to change the level of cash. "Stock" assets are the major source of the firm's earnings, and they are assumed to have higher expected returns per period than bonds but also to have higher transactions costs. The major concern, then, is with how "bonds" should be used as a buffer against random fluctuations in the cash account.

Suggested Citation

  • Gary D. Eppen & Eugene F. Fama, 1971. "Three Asset Cash Balance and Dynamic Portfolio Problems," Management Science, INFORMS, vol. 17(5), pages 311-319, January.
    • Handle: RePEc:inm:ormnsc:v:17:y:1971:i:5:p:311-319
    DOI: 10.1287/mnsc.17.5.311
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    Cited by:

    1. Hany Shawky & Ronald Forbes & Alan Frankle, 1983. "Liquidity Services and Capital Market Equilibrium: The Case for Money Market Mutual Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 6(2), pages 141-152, June.
    2. Marcos Melo & Feruccio Bilich, 2013. "Expectancy balance model for cash flow," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(2), pages 240-252, April.
    3. Juliana Nascimento & Warren Powell, 2010. "Dynamic Programming Models and Algorithms for the Mutual Fund Cash Balance Problem," Management Science, INFORMS, vol. 56(5), pages 801-815, May.
    4. 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.
    5. Bensoussan, Alain & Chutani, Anshuman & Sethi, Suresh, 2009. "Optimal Cash Management Under Uncertainty," MPRA Paper 19896, University Library of Munich, Germany.

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