ROBERT J. ELLIOTT () (Haskayne School of Business, University of Calgary, Calgary, AB T2N1N4, Canada; School of Mathematics, University of Adelaide, Adelaide, SA 5005, Australia) HONG MIAO () (Finance and Real Estate Department, Colarado State University, Fort Collins, CO 80523, USA) JIN YU () (Vienna Graduate School of Finance, Heiligenstaedter Strasse 46â48, 1190 Vienna, Austria)
Abstract
We investigate the optimal investment timing strategy in a real option framework. Depending on the state of the economy, whose changes are modeled by a Markov chain, the investment cost can take one of two values. The optimal investment timing decision is determined by finding the free boundary of a perpetual American option. Three investment timing policies, based on different assumptions of investors' information sets, are determined and compared. In the full information case, a significantly earlier optimal exercising time is indicated. We show that an optimal-timing policy suggested by the conventional real option model might ruin the investment opportunities.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.