STOCHASTIC PRODUCTION PLANNING WITH REGIME SWITCHING

Abstract

This paper considers a stochastic production planning problem with regime switching. There are two regimes corresponding to different economic cycles. A factory is planning its production so as to minimize production costs. We analyze this problem and the optimal production is characterized through an elliptic system of partial differential equations which can be numerically solved. We perform a sensitivity analysis for which we provide an intuition. A model risk analysis reveals the effect of adding regime switching to the modelling.