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Modelling the lifetime of banknotes with a semi-Markov chain model

Modelling the lifetime of banknotes with a semi-Markov chain model
Modelling the lifetime of banknotes with a semi-Markov chain model
The quality of banknotes in circulation is important for cash cycles. Central banks continuously try to find new methods for improving the quality of banknotes in circulation, whether by improving the specification of the banknotes or the characteristics of the cash cycle. The way that banknotes deteriorate and the speed with which they do so are some of the main factors affecting the quality of banknotes in circulation and thus, have been drawing the interest of central banks. This study develops a new semi-Markov chain model that could be used by banknote printing companies and central banks to model banknote deterioration. Discrete states of fitness are used in this semi-Markov model to simulate how the banknotes transit between fitness levels. The model requires some input parameters to simulate the cash cycle and present the probability distributions for each state. It is applied to theoretical cash cycles and a sensitivity analysis is performed to identify the parameters that have the greatest impact on the quality of banknotes. This study is the first to apply a semi-Markov model to estimate the lifetime of banknotes. It can be used as a forecasting tool for the proportion of unfit banknotes in circulation.
0160-5682
Loizidou, Emily
97841a53-7677-4f09-ae1f-d1d25a2ec367
Jones, Simon
02c69643-bde1-4837-a8ab-31742f484a3d
Grey, Emma
832613d1-0172-41e5-87c7-b4e737bf9fbc
So, Mee
c6922ccf-547b-485e-8b74-a9271e6225a2
Loizidou, Emily
97841a53-7677-4f09-ae1f-d1d25a2ec367
Jones, Simon
02c69643-bde1-4837-a8ab-31742f484a3d
Grey, Emma
832613d1-0172-41e5-87c7-b4e737bf9fbc
So, Mee
c6922ccf-547b-485e-8b74-a9271e6225a2

Loizidou, Emily, Jones, Simon, Grey, Emma and So, Mee (2020) Modelling the lifetime of banknotes with a semi-Markov chain model. Journal of the Operational Research Society. (doi:10.1080/01605682.2020.1843979).

Record type: Article

Abstract

The quality of banknotes in circulation is important for cash cycles. Central banks continuously try to find new methods for improving the quality of banknotes in circulation, whether by improving the specification of the banknotes or the characteristics of the cash cycle. The way that banknotes deteriorate and the speed with which they do so are some of the main factors affecting the quality of banknotes in circulation and thus, have been drawing the interest of central banks. This study develops a new semi-Markov chain model that could be used by banknote printing companies and central banks to model banknote deterioration. Discrete states of fitness are used in this semi-Markov model to simulate how the banknotes transit between fitness levels. The model requires some input parameters to simulate the cash cycle and present the probability distributions for each state. It is applied to theoretical cash cycles and a sensitivity analysis is performed to identify the parameters that have the greatest impact on the quality of banknotes. This study is the first to apply a semi-Markov model to estimate the lifetime of banknotes. It can be used as a forecasting tool for the proportion of unfit banknotes in circulation.

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More information

Accepted/In Press date: 24 October 2020
e-pub ahead of print date: 30 November 2020

Identifiers

Local EPrints ID: 445002
URI: http://eprints.soton.ac.uk/id/eprint/445002
ISSN: 0160-5682
PURE UUID: 4c8fa87b-83d3-4363-b502-27faadf2e173
ORCID for Mee So: ORCID iD orcid.org/0000-0002-8507-4222

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Date deposited: 17 Nov 2020 17:39
Last modified: 17 Mar 2022 05:01

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Contributors

Author: Emily Loizidou
Author: Simon Jones
Author: Emma Grey
Author: Mee So ORCID iD

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