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Showing papers in "international journal of management science and engineering management in 2015"


Journal ArticleDOI
TL;DR: In this article, a causal diagram was used to represent the relationships between each lean and green measure through the traditional four BSC perspectives: financial, customer, internal business process and learning and growth.
Abstract: This paper investigates how to evaluate lean and green supply chain performance through a traditional Balanced Scorecard (BSC). To attain the paper's objective, in a first stage a literature review was carried out to provide a comprehensive understanding of how lean and green can be compatible in a supply chain, how the performance should be evaluated, and how the BSC can evaluate the lean and green supply chain performance. Next, a conceptual framework was developed to investigate how lean and green initiatives can affect supply chain performance. A causal diagram was used to represent the relationships between each lean and green measure through the traditional four BSC perspectives: financial, customer, internal business process and learning and growth. It is possible to recognize that lean and green initiatives influence the linkages between performance measures. These linkages were established by anecdotal evidence derived from the literature review; they are an example of how to evaluate the organiz...

45 citations


Journal ArticleDOI
TL;DR: A novel comparison between different ranking methods applied to several case studies of logical decision trees is presented and a comparative study of the different methods for setting the importance measures is performed in order to determine the differences between them.
Abstract: Firms require to optimize any decisions taken for increasing their competitiveness. Each decision will depend of a large number of causes. The relations between the causes and the decisions are effected by the decision making process. An approach to finding the best solution to each logistical or organizational problem is to identify the main causes which are involved for the best decision. A qualitative and a quantitative analysis to facilitate the decision making process is carried out in this paper employing logical decision trees together with binary decision diagrams. This paper presents a novel comparison between different ranking methods applied to several case studies of logical decision trees. The ranking methods considered in this paper are ‘Level’, ‘AND’ and the topological heuristic methods Top-Down-Left-Right, Depth-First-Search and Breath-First-Search. Importance measures have been used for ranking the basic events of the logical decision trees according to their contribution to the top even...

28 citations


Journal ArticleDOI
TL;DR: The results show that the proposed methodology, which involves decision maker's preference information, is an effective tool to aid maintenance managers in accurate KPI selection tasks according to maintenance objectives and strategies.
Abstract: Many key performance indicators (KPIs) can be used for measuring maintenance performance Companies must implement a suitable set of KPIs to measure the performance of maintenance services and the influence of practices implemented in their activities Establishing a useful set of maintenance KPIs depends on a company's maintenance objectives and is highly related to specific business contexts, strategies, processes, and systems Maintenance managers deal with the complex tasks of finding the best performance indicators that can help them to achieve goals This paper presents a new approach to selecting relevant maintenance KPIs using a methodology based on the original ELECTRE I, which is a multi-criteria decision making method The proposed methodology, which involves decision maker's preference information, determines a ranking of possible alternatives following its evaluation according to important criteria To validate the methodology, a case study is presented The results show that this methodology

23 citations


Journal ArticleDOI
TL;DR: In this paper, a survey of 60 contractors and 45 consultants from the West Bank in Palestine was performed to identify the factors affecting the accuracy of cost estimating construction projects in the early phase of project development is crucial for project planning and financing.
Abstract: Estimating the cost of construction projects with high accuracy at the early phase of project development is crucial for project planning and financing. Construction clients require early and accurate cost advice prior to site acquisition and commitment to build in order to enable them to take the correct decision concerning whether to construct the project or not. However, many factors might affect the accuracy of a cost estimate. This study aims at identifying the factors affecting the accuracy of cost estimating construction projects in the West Bank in Palestine. A survey of 60 contractors and 45 consultants from the West Bank in Palestine was performed. Forty-one factors are identified in the study. The study investigates the impact of those factors measured by level of importance and ranked according to an importance index from both the contractors' and the consultants' points of view. The degree of agreement between the participating parties on the importance ranking of the factors affecting cost e...

19 citations


Journal ArticleDOI
TL;DR: The pressure to reduce decision time cycles and to be able to react and anticipate competitors is a requisite for survival and the key to success as discussed by the authors, therefore, companies should apply new models to in...
Abstract: The pressure to reduce decision time cycles and to be able to react and anticipate competitors is a requisite for survival and the key to success. Therefore, companies should apply new models to in...

18 citations


Journal ArticleDOI
TL;DR: In this article, an uncertain interval-based robust optimization model with two distinct demand streams is proposed; simultaneously, the uncertainty of shortage and penalty costs are taken into account for both new and remanufactured products, which have distinguished behaviors.
Abstract: Owing to the rapid growth of environmental and managerial issues, remanufacturing of products has emerged as a significant topic. The main focus of this paper is on the uncertainty in a closed-loop supply chain network, and a robust optimization technique is presented to overcome it. In this regard, an uncertain interval-based robust optimization model with two distinct demand streams is proposed; simultaneously, the uncertainty of shortage and penalty costs are taken into account for both new and remanufactured products, which have distinguished behaviors. To illustrate the preference of the proposed robust model, the optimality of deterministic and robust optimization models is examined in different test problems. The solution reveals that the proposed methodology performs very well in terms of the quality of the solutions obtained.

17 citations


Journal ArticleDOI
Ajanta Roy1
TL;DR: In this paper, the effect of uncertainty on the performance of fuzzy set theory in the inventory control of deteriorating items is investigated and an uncertain cycle time is considered and described by a (symmetric) triangular fuzzy number.
Abstract: This article focuses on the implementation of fuzzy set theory in the inventory control of deteriorating items where holding cost and deterioration rate are considered as linearly increasing functions of time. An uncertain cycle time is considered and described by a (symmetric) triangular fuzzy number. Demand rate as a function of selling price is also considered. The optimum results are defuzzified by a signed distance method. All results are illustrated numerically and graphically. This research investigates the effect of uncertainty and also directs one to realize the great importance of uncertainty in managing inventory control activity.

16 citations


Journal ArticleDOI
TL;DR: In this article, a Mohammadi-Ghazanfari model is proposed for combining the theory of constraints with systems dynamics to deal with soft problems, which can assist in creating a complementary understanding of complexity through specific processes.
Abstract: This article discusses multi-methodology approaches. The authors explain that multi-methodology approaches assist in creating a complementary understanding of complexity through specific processes. A new Mohammadi–Ghazanfari model is proposed for combining the theory of constraints with systems dynamics to deal with soft problems. This model consists of two phases. The first phase is the appreciation and analysis of the problem. The second phase includes assessment and evaluation actions. The first phase is described using a subsidized milk industry study in Iran.

14 citations


Journal ArticleDOI
TL;DR: A genetic algorithm as well as simulated annealing are utilized to validate the results obtained and to evaluate the performance of ICA, a meta-heuristic imperialist competitive algorithm developed to find a near-optimum solution of the single-objective problem.
Abstract: In this paper, a manufacturing facility with independent workstations for remanufacturing returned products is investigated. Not only do the stations have limited capacities so that an outsourcing strategy can be practiced, but also the capacities are decision variables. Each workstation is first modeled as an M/M/1/k queuing system with k being a variable. Then bi-objective integer nonlinear programming is developed to find the optimum capacities. The first objective tries to minimize the total waiting times and the second one maximizes the minimum utilization of the workstations. To solve the complicated bi-objective integer nonlinear programming problem, the best out of seven multi-objective decision-making methods is selected to make the bi-objective optimization problem a single-objective one. Afterwards, a meta-heuristic imperialist competitive algorithm (ICA) is developed to find a near-optimum solution of the single-objective problem. Since no benchmark is available in the literature, a genetic al...

12 citations


Journal ArticleDOI
TL;DR: A multi-objective mixed integer mathematical programming model for both decreasing several logistics costs and increasing the service level in supply chain is proposed and is capable of handling the case study in the dairy industry.
Abstract: The performance of a supply chain should usually be measured by multiple criteria. In this paper, a logistic planning and design problem in a multi-echelon supply chain consisting of suppliers, manufacturers, and distribution centers is introduced. A multi-objective mixed integer mathematical programming model for both decreasing several logistics costs and increasing the service level in supply chain is proposed. Several constraints due to real-world conditions are also considered in the proposed model. Also, a weighted goal programming approach is proposed to solve the multi-objective optimization problem. The efficacy and applicability of the model are illustrated through a numerical example inspired from a real case study in the dairy industry. The results are promising and the proposed model is capable of handling the case study. The parameters of the proposed approach are also analysed using a sensitivity analysis procedure considering several scenarios.

11 citations


Journal ArticleDOI
TL;DR: In this article, the authors investigated the effect of forecasting methods on the intensity of the bullwhip effect when the applied forecasting methods are not equal, and each layer of the chain may use his/her own method without any information on how other nodes forecast their own demands.
Abstract: In this study we have investigated the bullwhip effect and then we have modelled demand forecasting in two- and three-level supply chains by using exponential smoothing and moving average methods. Concerning chains, we have considered two- and three-level chains, and 300-period and 500-period horizons. Demand patterns fall into two major groups: first, a raising pattern with low variability; and second, a diminishing demand with high variability. Our goal is to examine and trace the effect of forecasting methods on the intensity of the bullwhip effect when the applied forecasting methods are not equal, and each layer of the chain may use his/her own method without any information on how other nodes forecast their own demands. Reviewing the literature, there are only a few studies such this one that consider dissimilar forecasting methods in one chain. Because of a lack of information sharing, and a large difference in forecasting parameters in this kind of modelling, there should be a large amount of dema...

Journal ArticleDOI
TL;DR: In this article, the authors examined the relationship between each of the five forces, as well as activities in value chains and information technology (IT) strategy, and found that threats of new entrants and the bargaining power of customers are positively related to firms' IT strategy as a business strategy, while other forces are negatively related to those strategies.
Abstract: Michael Porter's classic framework, ‘Five Forces’ presents the state of competition in an industry with five basic forces, such as the threat of new entrants, the bargaining power of suppliers, the bargaining power of customers, the threat of substitute products or services, and the industry jockeying for position among current competitors. Porter also shows how ‘value chains’ were the key to maintaining competitive advantage. In this paper, Japanese small and medium enterprises (SMEs) examine the relationship between each of the five forces, as well as activities in value chains and information technology (IT) strategy. Empirical findings in this research present how threats of new entrants and the bargaining power of customers are positively related to firms' IT strategy as well as business strategy, while other forces are negatively related to those strategies. The results on value chain activities imply that Japanese SMEs are focusing their business, as well as IT, strategy mainly on their primary act...

Journal ArticleDOI
Veena Goswami1
TL;DR: This paper presents a renewal input finite buffer queueing system with balking, reneging and multiple working vacations, and provides a recursive algorithm to compute the stationary system length distributions during vacations and regular busy periods.
Abstract: This paper presents a renewal input finite buffer queueing system with balking, reneging and multiple working vacations. Arriving customers decide either to enter the system or to balk, and renege (leave the queue after entering) without being served, based on their desire for service, or their unwillingness for waiting. The inter-arrival times of customers are assumed to be arbitrarily distributed. Service times during a service period, vacation times and service times during vacation are assumed to be exponentially distributed. Employing the supplementary variable technique, we provide a recursive algorithm to compute the stationary system length distributions during vacations and regular busy periods. Based on the various system length distributions, various performance measures of the model and some special cases have been investigated. Numerical results illustrating the effect of the parameters on several performance characteristics are also presented.

Journal ArticleDOI
TL;DR: In this paper, the authors investigated the classical newsboy problem in the light of cooperative advertising policy in a two layer supply chain where the manufacturer and the retailer are the members of the chain.
Abstract: The paper investigates the classical newsboy problem in the light of cooperative advertising policy in a two layer supply chain where the manufacturer and the retailer are the members of the chain. As the shelf-life of newsboy products is very short, so advertising has immense importance for the newsboy problem. The prime objective of this paper is to introduce an advertising policy that will increase sales and eventually avoid the chance of overstocking of products. Another prospect of the advertising policy is that it will also help companies to attract a wider range of target customers by highlighting the different lucrative characteristics of their product. In this paper, an expected average channel profit has been calculated and maximized analytically. Numerical examples are considered in order to test the model and one of them is illustrated graphically. Finally, sensitivity analysis of the model with respect to key parameters of the system is carried out.

Journal ArticleDOI
TL;DR: This research advances understanding of the limitations of existing data in ERP and proposes an approach for overcoming some of these limitations by using integrated data.
Abstract: This paper aims to address limitations with existing data structures and associated production planning and scheduling methods in enterprise resource planning (ERP). The methodology consists of: (i) the development of a theoretical framework of integrated data and associated planning and scheduling methods, (ii) the implementation of integrated data in ERP, and (iii) the development of a model for evaluating the impact of slack times on lead-time using existing data structures. Integrated data using additional relationships provide the capabilities of simultaneous and forward planning of various data elements (materials, activities, operations and resources) and finite leading of resources. Numerical simulation shows that planning of integrated data results in shorter lead-times than has been traditional. Furthermore, it is noted that integrated data with graphical display enables data maintainability, flexibility and transparency for better planning and scheduling. Furthermore, the number of assemblies a...

Journal ArticleDOI
TL;DR: In this article, the authors proposed a production lotsize model in which the production process shifts from an in-control state to an out of control state at any random time, and the total cost in this production system includes the production cost, the setup cost, holding cost and the cost of rew...
Abstract: In the basic economic production lotsize model, it is assumed that all produced items are of prefect quality. But in practice, the experience is that no production process can produce all items of perfect quality. Most of the production system produces both perfect and imperfect quality items. In some cases, imperfect quality items are reworked at a cost to repair their quality. This rework cost can be reduced by reducing the product reliability parameter. However, when the product reliability parameter decreases, the development cost of production increases at the same time. The unit production cost is a function of the product reliability parameter and the production rate. Therefore, higher development cost increases unit production cost. In the proposed model, we have assumed that the production process shifts from an in-control state to an out-of-control state at any random time. The total cost in this production system includes the production cost, the setup cost, the holding cost and the cost of rew...

Journal ArticleDOI
TL;DR: The adopted FGP approach outperforms the RSM approach in optimizing the performance of the tapping and stringing process for photovoltaic panels, taking into consideration preferences for process factor settings and quality responses.
Abstract: This research aims at optimizing the performance of the tapping and stringing process for photovoltaic panel production. Two optimization approaches are implemented, i.e. the response surface methodology (RSM) and the fuzzy goal programming (FGP) approaches. Two main responses are of performance interest, namely the cell output power and the soldering strength. Power has a larger-the-better response within the range 0.8 to 1.0 W, while strength has a nominal-the-best response with a target of 5 N. Three key process factors are studied, i.e. hot air flow, temperature, and pressure. Using the RSM (FGP) approach, the factor settings are determined for a hot air flow at 23 (18.3) L/min, a soldering temperature of 169.7 (206)°C, and a pressure of 0.4 (0.2) MPa. The optimal factor settings for RSM (FGP) result in powers and strengths of 0.851,337 (0.85 W) and 6.015 (5) N, respectively. It is found that the adopted FGP approach outperforms the RSM approach in optimizing the performance of the tapping and stringi...

Journal ArticleDOI
TL;DR: A hybrid fuzzy bi-objective nonlinear programming model which is composed of a qualitative objective related to customers' satisfaction and a quantitative objective function, i.e. the maximization of revenue minus the total cost is presented.
Abstract: The rapid growth of e-business has paved the way for traditional retailers to distribute their items via the Internet. The success of online retailers (e-tailers) in the extremely competitive online marketplace depends on providing a beneficial and efficient scheme for customers' orders fulfillment. In this paper, a joint model of pricing and online fulfillment assignment is presented for a distribution system in which a supplier sells items through an e-tail channel under the possibility of using substitute items with the satisfaction of customers' demands and delivery times. The aim of the model is to be ‘lean’ by minimizing operational cost and ‘agile’ through providing quick simultaneous reactions to market changes. We present a hybrid fuzzy bi-objective nonlinear programming model which is composed of a qualitative objective related to customers' satisfaction and a quantitative objective function, i.e. the maximization of revenue minus the total cost. After applying an appropriate strategy to defuzzi...

Journal ArticleDOI
TL;DR: The proposed approach can handle scenarios for identifying whether a specific customer value is preferred by the end customer and what practices should be implemented; or vice versa, in cases where a specific practice is implemented, identifying how it contributes to customer values.
Abstract: The ultimate goal of supply chains is to satisfy their end customers. To do so, they implement a set of practices along their chain in order to generate value for customers. Therefore, aligning supply chain practices with customer values is a core objective of supply chains. The current research employs Bayesian Networks (BNs) and Analytic Network Processes (ANPs) to integrate practices and customer values in a supply chain as well as quantifying their mutual correlations. In the first phase, it collects and analyzes data about six specific customer values; in the second phase, the importance of practices is evaluated by experts in the respective industry using ANPs; and in the final phase, the output of the two analyses meet in a BN to generate a model which is capable of quantifying their mutual correlations given the input data. In addition, the proposed approach can handle scenarios for identifying whether a specific customer value is preferred by the end customer and what practices should be implemen...

Journal ArticleDOI
TL;DR: In this article, the authors develop a dynamic model in which a firm exercises an option to expand production with a cash balance and costly external funds, and reveal how the firm's financing and investment policy depends on its cash flow and balance.
Abstract: We develop a dynamic model in which a firm exercises an option to expand production with a cash balance and costly external funds. By proving the properties of the option exercise regions, we reveal how the firm's financing and investment policy depends on its cash flow and balance. In the presence of only a proportional cost of external financing, the firm with more cash balance invests earlier; however, the presence of both proportional and fixed costs leads to a non-monotonic relation between the investment time and the cash balance. The firm with more cash balance invests later to save a fixed cost, particularly when the cash balance is close to the investment cost. Our results can potentially account for a variety of empirical results concerning the relation between investment and internal funds.

Journal ArticleDOI
TL;DR: A dynamic Pareto-optimal method for flexible job shop scheduling based on two criteria simultaneously: the relative manufacturing cost criterion and the average orders utility criterion is presented.
Abstract: This paper presents a dynamic Pareto-optimal method for flexible job shop scheduling based on two criteria simultaneously: the relative manufacturing cost criterion and the average orders utility criterion. Group scheduling for a given set of jobs with due dates that are typical for a ‘make-to-order’ strategy is considered. In this method the concept of production intensity as a dynamic production process parameter is used. A software package allows scheduling for a medium quantity of jobs. The result of software application is the set of non-dominant versions proposed to a user for making a final choice.

Journal ArticleDOI
TL;DR: In this paper, a modification of the consignment policy model presented by Chen and Liu in 2007, with imperfect product quality, a single supplier and multiple retailers, was proposed, where a 100% inspection of the product is considered.
Abstract: In this study, the authors propose a modification of the consignment policy model presented by Chen and Liu in 2007, with imperfect product quality, a single supplier and multiple retailers. A 100% inspection of the product is considered. Conforming product from the supplier is sold to the customer and non-conforming product is scrapped and sold at a lower price. Taguchi's quadratic quality loss function is used for measuring product quality. The optimum supplier's process mean, per-unit commission, fixed commission fee, and production run length and each retailer's economic order quantity will be jointly determined under the maximum expected total profit including the single supplier and multiple retailers. Numerical results show that the selling price per unit and the mean of the customer demand have major effects on the expected profit of the supply chain system.

Journal ArticleDOI
TL;DR: A discrete-time finite buffer GI/Geo/1 queue with multiple working vacations wherein the customers may balk due to impatience, and the effect of model parameters on key performance measures is demonstrated.
Abstract: This paper analyzes a discrete-time finite buffer GI/Geo/1 queue with multiple working vacations wherein the customers may balk due to impatience. The service times during working vacation and vacation times are assumed to be geometrically distributed. Embedded Markov chain and supplementary variable techniques have been adopted to obtain the steady-state system length distributions at pre-arrival and arbitrary epochs, respectively. Various performance measures of the model and waiting-time distribution are also presented. A variety of numerical results showing the effect of model parameters on key performance measures are demonstrated.

Journal ArticleDOI
TL;DR: In this article, the diffusion of innovation concepts in Portuguese manufacturing companies is explored based on the literature, the concepts of technical and non-technical innovations are explored and three purposes guide the study: (i) to what extent technological and organizational innovation concepts are diffused in Portuguese Manufacturing companies; (ii) how the use of technological innovation concepts were interrelated with the use OFDM concepts; and (iii) Portuguese companies since 2009 have introduced product innovation and product-related service innovation.
Abstract: This paper focuses on the diffusion of innovation concepts in Portuguese manufacturing companies. Based on the literature, the concepts of technical and non-technical innovations are explored and three purposes guide our study: (i) to what extent technological and organizational innovation concepts are diffused in Portuguese manufacturing companies; (ii) how the use of technological innovation concepts are interrelated with the use of organizational innovation concepts; and (iii) to what extent Portuguese companies since 2009 have introduced product innovation and product-related service innovation. Data were collected from 62 companies participating in the European Manufacturing Survey (EMS) 2012 and findings indicate that: (i) Portuguese manufacturing companies are more organizationally innovation oriented where quality and price are quoted as the most important competitive factors, whilst service offerings and service sales attain far less rank; (ii) technological innovation concepts are significantly ...

Journal ArticleDOI
TL;DR: A modification of the model, presented by Kapur and Wang in 1987, for obtaining optimal product specification limits (tolerance) with minimum expected total cost per unit of product under the satisfaction of specified process capability values is proposed.
Abstract: In this paper, the authors propose a modification of the model, presented by Kapur and Wang in 1987, for obtaining optimal product specification limits (tolerance) with minimum expected total cost per unit of product under the satisfaction of specified process capability values, i.e. assuming the product target value is equal to the specification center, that the value of the specified process capability index, Cp or Cpk, is given, and that 100% inspection is executed before the product is shipped to the customer. The asymmetric quadratic quality loss function presented by Taguchi in 1986 is applied for evaluating product quality. The mathematical optimization model and its solution procedure are formulated. Finally, a numerical example and a sensitivity analysis of the parameters are provided for illustration.

Journal ArticleDOI
TL;DR: A general linear bi-level model with random fuzzy variables is introduced and several properties and crisp equivalents are proposed to deal with the derived expectedBi-level programming problem; after several iterations, the interactive solutions converge to the optimal one.
Abstract: A home supplies manufacturer manufactures many products and each requires workers with different skills. The manufacturer invites a contracting company to supply workers with different skills for each phase of the production process. The problem becomes a production and work force assignment problem, which can be considered as a bi-level programming problem. The supplier, as the upper decision maker, aims to achieve the objective of maximizing gross revenue by making decisions concerning production levels. The contracting company, as the lower-level decision maker, regards the target to be maximizing profit by making decisions concerning the number of assigned workers. There are uncertainties during the production process and therefore the problem has random fuzzy coefficients. To deal with the uncertainties, a general linear bi-level model with random fuzzy variables is introduced and several properties and crisp equivalents are proposed. Then an interactive programming method is applied to deal with the...

Journal ArticleDOI
TL;DR: This paper uses the past thirty months' gas leak data in each county to specify which employee should report to the location at nights, on weekends, and on holidays, and uses the center-of-gravity method and linear programming to accomplish these assignments.
Abstract: This paper is about analysing and improving the emergency response system to gas leaks of a utility company in central Pennsylvania. We use the past thirty months' gas leak data in each county to specify which employee should report to the location at nights, on weekends, and on holidays. This determination is based on distances between his/her home and the incident. The company requires the response time to be shorter than 45 minutes. In this paper, we focus on mathematical modeling for assigning employees to the three counties of interest. Specifically, we use the center-of-gravity method and linear programming to accomplish these assignments. The recommendation of the model is validated by the results of its successful implementation.

Journal ArticleDOI
TL;DR: A glimpse into EMEE from the points of view of the urban planning of petroleum-oriented cities and the National Ecological Network for Research and Education of Azerbaijan is taken.
Abstract: Xu and Li in ‘A review on ecological engineering based engineering management’, published in the journal Omega (Vol. 40, 2012, pp. 368–378) claimed that engineering management should be based on ecological engineering. They defined Ecological Engineering based Engineering Management (EMEE) and presented a review of EMEE to summarize past research and guide future research. The uniqueness of the paper was that it stated that previous literature on the underlying subject was very generalized and broad. As a short communication, this paper takes a glimpse into EMEE from the points of view of the urban planning of petroleum-oriented cities and the National Ecological Network for Research and Education of Azerbaijan.

Journal ArticleDOI
TL;DR: A methodology for the evaluation of probability of in-stock of a spare parts procurement policy in a manufacturing industry, based on the demand–supply interference, similar to the stress–strength interference principle generally used in reliability engineering literature is proposed.
Abstract: This paper proposes a methodology for the evaluation of probability of in-stock of a spare parts procurement policy in a manufacturing industry. The methodology is based on the demand–supply interference, similar to the stress–strength interference principle generally used in reliability engineering literature. The paper also proposes a methodology to develop a spare parts procurement policy in order to satisfy the specified target probability of in-stock. Numerical examples are also presented to illustrate the proposed methods.

Journal ArticleDOI
Eymen Errais1
TL;DR: In this paper, a flexible multivariate extension to the LIBOR market model is introduced, which is analytically tractable and can be used to calibrate to cap prices.
Abstract: We introduce a flexible multivariate extension to the LIBOR market model that is analytically tractable. The flexibility of the model is a solution to the interest rate market dislocation that happened on the credit crunch aftermath in August 2007. The extension is based on a parameter uncertainty modeled through a random variable whose value is drawn at an infinitesimal time after zero. The proposed shift captures the skew commonly seen in the cap market, whereas the uncertain volatility component of the model allows us to obtain more general implied volatility structures. We show how this model can be calibrated to cap prices. We also propose an analytical approximated formula to price swaptions from the cap calibrated model. Finally, we build a bridge between the caps and swaptions markets by calibrating the correlation structure to swaption prices, and analysing some implications of the calibrated model parameters.