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Irreversibility and Interest Rates

Author

Listed:
  • Giuseppe Travaglini

    (Faculty of Economics, University of Urbino Carlo Bo, Italy)

Abstract

The literature on irreversible investment fails to explore the relationship between the present value of alternative strategies and appropriate risk-adjusted interest rates. We attempt to fill this gap by showing that, to avoid arbitrage opportunities, the real option¡¦s rate must be higher than the rate of the immediate strategy. Further, we explain how irreversibility influences the risk-return combination of competing strategies acting as a pure risk factor.

Suggested Citation

  • Giuseppe Travaglini, 2006. "Irreversibility and Interest Rates," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 5(2), pages 173-183, August.
    • Handle: RePEc:ijb:journl:v:5:y:2006:i:2:p:173-183
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    irreversibility; real option; risk-adjusted rate;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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