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Regime uncertainty and optimal investment timing

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  • Nishide, Katsumasa
  • Nomi, Ernesto Kazuhiro

Abstract

We construct a real options model in which a regime change is expected at a pre-determined future time and study the effects of regime uncertainty on a firm's strategic investment decision, taking into consideration the remaining time to the regime change and the probability of each regime state. We show that just before the time of a regime change, firms should act as if the worst-case scenario was about to happen, even if a good state is highly possible.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 10 (October)
Pages: 1796-1807

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:10:p:1796-1807

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Investment timing Real options Policy change Regime uncertainty;

References

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  1. Pawlina, G. & Kort, P.M., 2004. "Investment under uncertainty and policy change," Open Access publications from Tilburg University urn:nbn:nl:ui:12-148455, Tilburg University.
  2. Xin Guo & Jianjun Miao & Erwan Morellec, 2002. "Irreversible Investment with Regime Shifts," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp99, International Center for Financial Asset Management and Engineering.
  3. Kevin Hassett & Gilbert E. Metcalf, 1994. "Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," NBER Working Papers 4780, National Bureau of Economic Research, Inc.
  4. S. D. Jacka, 1991. "Optimal Stopping and the American Put," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 1(2), pages 1-14.
  5. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
  6. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  7. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  8. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
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Citations

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Cited by:
  1. Katsumasa Nishide & Kyoko Yagi, 2013. "Competition and the Bad News Principle in a Real Options Framework," KIER Working Papers 860, Kyoto University, Institute of Economic Research.
  2. Krysiak, Frank C., 2011. "Environmental regulation, technological diversity, and the dynamics of technological change," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(4), pages 528-544, April.
  3. Dearmon, Jacob & Grier, Robin, 2011. "Trust and the accumulation of physical and human capital," European Journal of Political Economy, Elsevier, vol. 27(3), pages 507-519, September.
  4. Makoto Goto & Katsumasa Nishide & Ryuta Takashima, 2013. "Irreversible Investment under Competition with a Markov Switching Regime," KIER Working Papers 861, Kyoto University, Institute of Economic Research.

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