Trade credit portfolio selection – a markovian approach

Abstract

The application of stochastic processes to the prediction of accounts receivable and cash flow is a classic financial operations research problem. Although there is a vast related literature, some theoretical and practical problems still exist. This paper investigates a form of vector which initiates a Markovian process because the distribution of this vector is much more simple for practical reasons than is suggested in literature. A Markovian prediction when the initial vector varies from period to period but a fundamental matrix is constant, is also examined. A more general case is a model in which the fundamental matrix, as well as the initial vector, is time varying. The main focus of this paper is to develop a criterion helpful in selecting clients on the basis of the definite risk of trade credit portfolio under Markovian model of accounts receivable.application of finite Markov chains, financial liquidity management, accounts receivable management