Value-at-Risk model for hazardous material transportation

Abstract

This paper introduces a Value-at-Risk (VaR) model to generate route choices for a hazmat shipment based on a specified risk confidence level. VaR is a threshold value such that the probability of the loss exceeding the VaR value is less than a given probability level. The objective is to determine a route which minimizes the likelihood that the risk will be greater than a set threshold. Several properties of the VaR model are established. An exact solution procedure is proposed and tested to solve the single-trip problem. To test the applicability of the approach, routes obtained from the VaR model are compared with those obtained from other hazmat objectives, on a numerical example as well as a hazmat routing scenario derived from the Albany district of New York State. Depending on the choice of the confidence level, the VaR model gives different paths from which we conclude that the route choice is a function of the level of risk tolerance of the decision-maker. Further refinements of the VaR model are also discussed.