Optimal investment timing using Markov jump price processes
AbstractIn this work, we address an investment problem where the investment can either be made immediately or postponed to a later time, in the hope that market conditions become more favourable. In our case, uncertainty is introduced through market price. When the investment is undertaken, a fixed sunk cost must be paid and a series of cash flows are to be received. Therefore, we are faced with an irreversible investment. Real options analysis provides an adequate framework for this type of problems by recognizing these two characteristics, uncertainty and irreversibility, explicitly. We describe algorithmic solutions for this type of problems by modelling market prices evolution by Markov jump processes.
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Bibliographic InfoPaper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 245.
Length: 25 pages
Date of creation: Jul 2007
Date of revision:
Irreversible investment; optimal stopping; dynamic programming; Markov jump processes;
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
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-08 (All new papers)
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