Irreversible investment under Lévy uncertainty: an equation for the optimal boundary

DOI10.1017/APR.2015.18zbMATH Open1341.93108arXiv1411.2395OpenAlexW3123475684MaRDI QIDQ2806358FDOQ2806358

Paavo Salminen, Giorgio Ferrari

Publication date: 17 May 2016

Published in: Advances in Applied Probability (Search for Journal in Brave)

Abstract: We derive a new equation for the optimal investment boundary of a general irreversible investment problem under exponential L'evy uncertainty. The problem is set as an infinite time-horizon, two-dimensional degenerate singular stochastic control problem. In line with the results recently obtained in a diffusive setting, we show that the optimal boundary is intimately linked to the unique optional solution of an appropriate Bank-El Karoui representation problem. Such a relation and the Wiener Hopf factorization allow us to derive an integral equation for the optimal investment boundary. In case the underlying L'evy process hits any real point with positive probability we show that the integral equation for the investment boundary is uniquely satisfied by the unique solution of another equation which is easier to handle. As a remarkable by-product we prove the continuity of the optimal investment boundary. The paper is concluded with explicit results for profit functions of (i) Cobb-Douglas type and (ii) CES type. In the first case the function is separable and in the second case non-separable.

Full work available at URL: https://arxiv.org/abs/1411.2395

Recommendations

• On an integral equation for the free-boundary of stochastic, irreversible investment problems
• On a stochastic, irreversible investment problem
• Explicit Solution of a Stochastic, Irreversible Investment Problem and Its Moving Threshold
• On an irreversible investment problem with two-factor uncertainty
• Optimal Boundary Surface for Irreversible Investment with Stochastic Costs

zbMATH Keywords

optimal stoppingirreversible investmentsingular stochastic controlfree-boundaryBank and El Karoui's representation theorembase capacityLévy process

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Stopping times; optimal stopping problems; gambling theory (60G40) Stochastic models in economics (91B70) Optimal stochastic control (93E20)

Cites Work

• Sequential testing problems for Poisson processes.
• Introductory lectures on fluctuations of Lévy processes with applications.
• Title not available (Why is that?)
• Choosing among alternative discrete investment projects under uncertainty
• Title not available (Why is that?)
• Title not available (Why is that?)
• Title not available (Why is that?)
• Minimizing a Submodular Function on a Lattice
• Irreversible investment
• On an integral equation for the free-boundary of stochastic, irreversible investment problems
• On irreversible investment
• Identifying the Free Boundary of a Stochastic, Irreversible Investment Problem via the Bank--El Karoui Representation Theorem
• Connections between Optimal Stopping and Singular Stochastic Control I. Monotone Follower Problems
• Optimal consumption choice with intertemporal substitution
• The monotone follower problem in stochastic decision theory
• Irreversible investment in oligopoly
• A stochastic representation theorem with applications to optimization and obstacle problems.
• Optimal Control under a Dynamic Fuel Constraint
• Firing Costs and Labour Demand: How Bad is Eurosclerosis?
• On a Stochastic, Irreversible Investment Problem
• A new approach to the skorohod problem, and its applications
• Title not available (Why is that?)
• Perpetual American Options Under Lévy Processes
• Optimal Investment with Costly Reversibility
• Optimal stopping, Appell polynomials, and Wiener–Hopf factorization
• Optimal Stopping for Processes with Independent Increments, and Applications
• Some remarks on first passage of Lévy processes, the American put and pasting principles
• Irreversible investment and industry equilibrium
• Optimal stopping and perpetual options for Lévy processes
• On the joint distribution of the maximum and its location for a linear diffusion
• Irreversible investment problems
• Explicit solution to an irreversible investment model with a stochastic production capacity
• Optimal stopping of Hunt and Lévy processes
• A Closed-Form Solution for the Exercise Strategy in a Real Options Model with a Jump-Diffusion Process
• Optimal stopping of strong Markov processes

Cited In (10)

• Irreversible investment with fixed adjustment costs: a stochastic impulse control approach
• Irreversible exit decisions under mean-reverting uncertainty
• On Optimization of Long-Term Irreversible Investments in a Diffusion Model
• A Knightian irreversible investment problem
• A stochastic partially reversible investment problem on a finite time-horizon: free-boundary analysis
• Explicit Solution of a Stochastic, Irreversible Investment Problem and Its Moving Threshold
• Optimal Boundary Surface for Irreversible Investment with Stochastic Costs
• Expected Supremum Representation of the Value of a Singular Stochastic Control Problem
• On a Class of Infinite-Dimensional Singular Stochastic Control Problems
• Generalized Kuhn-Tucker conditions for \(N\)-firm stochastic irreversible investment under limited resources

This page was built for publication: Irreversible investment under Lévy uncertainty: an equation for the optimal boundary

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2806358)