Analytical solution for an investment problem under uncertainties with shocks
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Publication:1751925
Abstract: We derive the optimal investment decision in a project where both demand and investment costs are stochastic processes, eventually subject to shocks. We extend the approach used in Dixit and Pindyck (1994), chapter 6.5, to deal with two sources of uncertainty, but assuming that the underlying processes are no longer geometric Brownian diffusions but rather jump diffusion processes. For the class of isoelastic functions that we address in this paper, it is still possible to derive a closed expression for the value of the firm. We prove formally that the result we get is indeed the solution of the optimization problem.
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Cited in
(15)- The solution to a differential-difference equation arising in optimal stopping of a jump-diffusion process
- Investment strategies of duopoly firms with asymmetric time-to-build under a jump-diffusion model
- Valuation of \(N\)-stage investments under jump-diffusion processes
- Investments with declining cost following a Lévy process
- A general framework for optimal stopping problems with two risk factors and real option applications
- Optimal investment and abandonment decisions for projects with construction uncertainty
- Explicit investment setting in a Kaldor macroeconomic model with macro shock
- Investment in two alternative projects with multiple switches and the exit option
- Impact of plant utilization on irreversible investment under uncertainty with application to refinery investment
- Switching from oil to gas production in a depleting field
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- Technology adoption in a declining market
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- Model risk in real option valuation
- Quasi-analytical solution of an investment problem with decreasing investment cost due to technological innovations
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