Costs of liquidity may be incurred by a firm through its inability to synchronize its cash receipts and payments. Liquidity costs include the opportunity cost of holding funds in the form of non-earning or low-yielding assets, some bank charges, and related transaction costs. Two models for minimizing these costs are presented in detail, a deterministic one, and a stochastic one based on the Miller-Orr model. Their limitations and possible application are discussed.
Chen, A.H.Y., F.C. Jen and S. Zionts, 1972, “Portfolio Models with Stochastic Cash Demands”, Management Science19, 319–32.
2.
Daellenbach, H.G., 1974, “Are Cash Management Optimization Models Worthwhile?”Journal of Financial and Quantitative Analysis, 9, 607–26.
3.
Eppen, G.D. and E.F. Fama, 1968, “Solutions for Cash-Balance and Simple Dynamic Portfolio Problems”, Journal of Business, 41, 94–112.
4.
Eppen, G.D. and E.F. Fama, 1969, “Cash Balance and Simple Dynamic Portfolio Problems with Proportional Costs”, International Economic Review, 10, 119–32.
5.
Eppen, G.D. and E.F. Fama, 1971, “Three Asset Cash Balance and Dynamic Portfolio Problems”, Management Science, 17, 311–19.
6.
Feller, W., 1968, An Introduction to Probability Theory and Its Applications, Vol. 1 (Wiley, New York).
7.
Magee, J.F., 1958, Production Planning and Inventory Control (McGraw-Hill, New York).
8.
Miller, M.H. and D. Orr, 1966, “A Model of the Demand for Money by Firms”, Quarterly Journal of Economics, 80, 413–35.
9.
Miller, M.H. and D. Orr, 1968, “The Demand for Money by Firms: Extensions of Analytic Results”, Journal of Finance, 23, 735–59.
10.
Miller, M.H. and D. Orr, 1974, “Mathematical Models for Financial Management”, in: K.V. Smith, ed., Management of Working Capital (West Publishing Co., St. Paul).
11.
Robichek, A.A., D. Teichroew and J.M. Jones, 1965, “Optimal Short Term Financing Decisions”, Management Science, 12, 1–36.
12.
Simon, H.A., 1960, The New Science of Management Decision (Harper and Row, New York).
13.
Wright, F.K., 1964, “Project Evaluation and the Managerial Limit”, Journal of Business, 37, 179–85.
