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Good timing: The economics of optimal stopping

  • Davis, Graham A.
  • Cairns, Robert D.

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.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 2 ()
Pages: 255-265

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:2:p:255-265
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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