Analytical solution for an investment problem under uncertainties with shocks
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Publication:1751925
DOI10.1016/J.EJOR.2017.01.008zbMATH Open1402.91896arXiv1509.04135OpenAlexW2962935452MaRDI QIDQ1751925FDOQ1751925
Authors: Rita Pimentel, Cláudia Nunes 
Publication date: 25 May 2018
Published in: European Journal of Operational Research (Search for Journal in Brave)
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.
Full work available at URL: https://arxiv.org/abs/1509.04135
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Processes with independent increments; Lévy processes (60G51) Numerical methods (including Monte Carlo methods) (91G60) Stopping times; optimal stopping problems; gambling theory (60G40)
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Cited In (15)
- Investment in two alternative projects with multiple switches and the exit option
- A general framework for optimal stopping problems with two risk factors and real option applications
- Title not available (Why is that?)
- Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery Investment
- Model risk in real option valuation
- Valuation of \(N\)-stage investments under jump-diffusion processes
- Switching from oil to gas production in a depleting field
- Investment timing and capacity choice in duopolistic competition under a jump-diffusion model
- Investments with declining cost following a Lévy process
- Technology adoption in a declining market
- Investment strategies of duopoly firms with asymmetric time-to-build under a jump-diffusion model
- Feed-in tariff contract schemes and regulatory uncertainty
- Optimal investment and abandonment decisions for projects with construction uncertainty
- Quasi-analytical solution of an investment problem with decreasing investment cost due to technological innovations
- Explicit investment setting in a Kaldor macroeconomic model with macro shock
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