Good timing: The economics of optimal stopping
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.
If you experience problems downloading a file, check if you have the proper application to view it first. 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.
Volume (Year): 36 (2012)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/jedc|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Wong, Kit Pong, 2007. "The effect of uncertainty on investment timing in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2152-2167, July.
- Jon M. Conrad, 1980. "Quasi-Option Value and the Expected Value of Information," The Quarterly Journal of Economics, Oxford University Press, vol. 94(4), pages 813-820.
- Hanemann, W. Michael, 1989. "Information and the concept of option value," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 23-37, January.
- Sarkar, Sudipto, 2003. "The effect of mean reversion on investment under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 377-396, November.
- Insley, M.C. & Wirjanto, T.S., 2010.
"Contrasting two approaches in real options valuation: Contingent claims versus dynamic programming,"
Journal of Forest Economics,
Elsevier, vol. 16(2), pages 157-176, April.
- Margaret Insley & Tony Wirjanto, 2008. "Contrasting two approaches in real options valuation: contingent claims versus dynamic programming," Working Papers 08002, University of Waterloo, Department of Economics.
- Litzenberger, Robert H & Rabinowitz, Nir, 1995. " Backwardation in Oil Futures Markets: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 50(5), pages 1517-1545, December.
- Mensink, Paul & Requate, Till, 2005. "The Dixit-Pindyck and the Arrow-Fisher-Hanemann-Henry option values are not equivalent: a note on Fisher (2000)," Resource and Energy Economics, Elsevier, vol. 27(1), pages 83-88, January.
- Hurn, A S & Wright, Robert E, 1994. "Geology or Economics? Testing Models of Irreversible Investment Using North Sea Oil Data," Economic Journal, Royal Economic Society, vol. 104(423), pages 363-371, March.
- Stiglitz, Joseph E, 1976. "Monopoly and the Rate of Extraction of Exhaustible Resources," American Economic Review, American Economic Association, vol. 66(4), pages 655-661, September.
- Alexander Triantis, 2005. "Realizing the Potential of Real Options: Does Theory Meet Practice?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 8-16.
- Harry R Clarke & William J. Reed, 1989.
"The Tree-Cutting Problem in a Stochastic Environment: The case of Age Dependent Growth,"
1989.01 EDIRC Provider-In, School of Economics, La Trobe University.
- Clarke, Harry R. & Reed, William J., 1989. "The tree-cutting problem in a stochastic environment : The case of age-dependent growth," Journal of Economic Dynamics and Control, Elsevier, vol. 13(4), pages 569-595, October.
- Harry R Clarke & William J. Reed, 1989. "The Tree-Cutting Problem in a Stochastic Environment: The case of Age Dependent Growth," Working Papers 1989.01, School of Economics, La Trobe University.
- Clarke, Harry R & Reed, William J, 1990. "Applications of Optimal Stopping in Resource Economics," The Economic Record, The Economic Society of Australia, vol. 66(194), pages 254-265, September.
- Dixit, Avinash & Pindyck, Robert S & Sodal, Sigbjorn, 1999. "A Markup Interpretation of Optimal Investment Rules," Economic Journal, Royal Economic Society, vol. 109(455), pages 179-189, April.
- Davis, Graham A & Cairns, Robert D, 1999. "Valuing Petroleum Reserves Using Current Net Price," Economic Inquiry, Western Economic Association International, vol. 37(2), pages 295-311, April.
- Malchow-Moller, Nikolaj & Thorsen, Bo Jellesmark, 2005. "Repeated real options: optimal investment behaviour and a good rule of thumb," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 1025-1041, June.
- Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
- Tsekrekos, Andrianos E., 2010. "The effect of mean reversion on entry and exit decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 725-742, April.
- Alvarez, Luis H.R. & Koskela, Erkki, 2007.
"Optimal harvesting under resource stock and price uncertainty,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 31(7), pages 2461-2485, July.
- Luis H. R. Alvarez & Erkki Koskela, 2005. "Optimal Harvesting under Resource Stock and Price Uncertainty," CESifo Working Paper Series 1384, CESifo Group Munich.
- Clarke, Harry R. & Reed, William J., 1988. "A stochastic analysis of land development timing and property valuation," Regional Science and Urban Economics, Elsevier, vol. 18(3), pages 357-381, August.
- Gordon Sick & Andrea Gamba, 2005. "Some Important Issues Involving Real Options," Working Papers wpn05-02, Warwick Business School, Finance Group.
- Richard Arnott & Frank D. Lewis, 1977.
"The Transition of Land to Urban Use,"
267, Queen's University, Department of Economics.
- Diderik Lund, 2003.
"How to analyze the investment–uncertainty relationship in real option models?,"
EPRU Working Paper Series
03-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Lund, Diderik, 2005. "How to analyze the investment-uncertainty relationship in real option models?," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 311-322.
- Ernesto Mordecki, 2002. "Optimal stopping and perpetual options for Lévy processes," Finance and Stochastics, Springer, vol. 6(4), pages 473-493.
- Reed, William J & Clarke, Harry R, 1990. "Harvest Decisions and Asset Valuation for Biological Resources Exhibiting Size-Dependent Stochastic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 147-169, February.
- A. Steven Holland & Steven H. Ott & Timothy J. Riddiough, 2000. "The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(1), pages 33-64.
- Fisher, Anthony C. & Hanemann, W. Michael, 1987. "Quasi-option value: Some misconceptions dispelled," Journal of Environmental Economics and Management, Elsevier, vol. 14(2), pages 183-190, June.
- Svetlana Boyarchenko, 2004. "Irreversible Decisions and Record-Setting News Principles," American Economic Review, American Economic Association, vol. 94(3), pages 557-568, June.
- Alberto Moel, 2002. "When Are Real Options Exercised? An Empirical Study of Mine Closings," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 35-64, March.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:36:y:2012:i:2:p:255-265. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.