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Good timing: The economics of optimal stopping

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

Abstract

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.

Suggested Citation

  • Davis, Graham A. & Cairns, Robert D., 2012. "Good timing: The economics of optimal stopping," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 255-265.
  • Handle: RePEc:eee:dyncon:v:36:y:2012:i:2:p:255-265
    DOI: 10.1016/j.jedc.2011.09.008
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Cairns, Robert D., 2014. "The green paradox of the economics of exhaustible resources," Energy Policy, Elsevier, vol. 65(C), pages 78-85.
    2. repec:eee:jbfina:v:81:y:2017:i:c:p:172-180 is not listed on IDEAS
    3. Cairns, Robert D. & Calfucura, Enrique, 2012. "OPEC: Market failure or power failure?," Energy Policy, Elsevier, vol. 50(C), pages 570-580.
    4. Hultkrantz, Lars & Andersson, Linda & Mantalos, Panagiotis, 2014. "Stumpage prices in Sweden 1909–2012: Testing for non-stationarity," Journal of Forest Economics, Elsevier, vol. 20(1), pages 33-46.
    5. Andersson, Linda & Hultkrantz , Lars & Mantalos , Panagiotis, 2013. "Stumpage Prices in Sweden 1909-2011: Testing for Non-Stationarity," Working Papers 2013:1, Örebro University, School of Business.
    6. Robert D. Cairns and Graham A. Davis, 2015. "Mineral Depletion and the Rules of Resource Dynamics," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    7. Agaton, Casper, 2017. "Real Options Analysis of Renewable Energy Investment Scenarios in the Philippines," MPRA Paper 83478, University Library of Munich, Germany.
    8. Yemshanov, Denys & McCarney, Geoffrey R. & Hauer, Grant & Luckert, M.K. (Marty) & Unterschultz, Jim & McKenney, Daniel W., 2015. "A real options-net present value approach to assessing land use change: A case study of afforestation in Canada," Forest Policy and Economics, Elsevier, vol. 50(C), pages 327-336.

    More about this item

    Keywords

    Investment timing; r-Percent rule; Real options; Investment under uncertainty; Wicksell;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General

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