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Good timing: The economics of optimal stopping

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Author Info

  • Davis, Graham A.
  • Cairns, Robert D.

Abstract

This 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 Info

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

Volume (Year): 36 (2012)
Issue (Month): 2 ()
Pages: 255-265

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:2:p:255-265

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

Related research

Keywords: Investment timing; r-Percent rule; Real options; Investment under uncertainty; Wicksell;

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References

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Cited by:
  1. Andersson, Linda & Hultkrantz , Lars & Mantalos , Panagiotis, 2013. "Stumpage Prices in Sweden 1909-2011: Testing for Non-Stationarity," Working Papers 2013:1, Örebro University, School of Business.
  2. Cairns, Robert D., 2014. "The green paradox of the economics of exhaustible resources," Energy Policy, Elsevier, vol. 65(C), pages 78-85.
  3. Hultkrantz, Lars & Andersson, Linda & Mantalos, Panagiotis, 2014. "Stumpage prices in Sweden 1909–2012: Testing for non-stationarity," Journal of Forest Economics, Elsevier, vol. 20(1), pages 33-46.

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