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Investments with declining cost following a Lévy process

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  • Armerin, Fredrik

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

Abstract

We consider an optimal investment problem in which the cost of the investment decreases over time. The decrease is modelled using the negative of a non-decreasing Lévy process. The decreasing cost is a way of modelling that innovations drive down the cost of the investment. Several explicit examples of how different Lévy processes influence the value of the investment are given.

Suggested Citation

  • Armerin, Fredrik, 2020. "Investments with declining cost following a Lévy process," Working Paper Series 20/14, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    • Handle: RePEc:hhs:kthrec:2020_014
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    References listed on IDEAS

    as
    1. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    2. Murto, Pauli, 2007. "Timing of investment under technological and revenue-related uncertainties," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1473-1497, May.
    3. Ernesto Mordecki, 2002. "Optimal stopping and perpetual options for Lévy processes," Finance and Stochastics, Springer, vol. 6(4), pages 473-493.
    4. Aase, Knut K., 2005. "The perpetual American put option for jump-diffusions with applications," Discussion Papers 2005/12, Norwegian School of Economics, Department of Business and Management Science.
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    More about this item

    Keywords

    Optimal stopping; irreversible investments; innovations; Lévy processes;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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