Good timing: The economics of optimal stopping
AbstractThis paper presents an economic interpretation of the optimal “stopping” of perpetual project opportunities under both certainty and uncertainty. Prior to stopping, the expected rate of return from delay exceeds the rate of interest. The expected rate of return from delay is the sum of the expected rate of change in project value and the expected rate of change in the option premium associated with waiting. At stopping the expected rate of return from delay has fallen to the rate of interest. Viewing stopping in this way unifies the theoretical and practical insights of the theory of stopping under certainty and uncertainty.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 36 (2012)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/jedc
Investment timing; r-Percent rule; Real options; Investment under uncertainty; Wicksell;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General
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