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Investment option under CIR interest rates

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  • Carmona, Julio
  • Leon, Angel

Abstract

We analyze extensively the characteristics of the solution to an irreversibleinvestment decision when the only source of uncertainty comes from interest rates.They are assumed to be driven by the popular Cox-Ingersoll-Ross (CIR) stochasticprocess. Particular attention is paid to the impact that both CIR parameters and riskaversion have on the threshold rate.
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Suggested Citation

  • Carmona, Julio & Leon, Angel, 2007. "Investment option under CIR interest rates," Finance Research Letters, Elsevier, vol. 4(4), pages 242-253, December.
  • Handle: RePEc:eee:finlet:v:4:y:2007:i:4:p:242-253
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    References listed on IDEAS

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    1. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
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    4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    6. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    7. 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.
    8. Luis H. R. Alvarez & Erkki Koskela, 2006. "Irreversible Investment under Interest Rate Variability: Some Generalizations," The Journal of Business, University of Chicago Press, vol. 79(2), pages 623-644, March.
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    Cited by:

    1. Dotsis, George, 2020. "Investment under uncertainty with a zero lower bound on interest rates," Economics Letters, Elsevier, vol. 188(C).
    2. Ewald, Christian-Oliver & Wang, Wen-Kai, 2010. "Irreversible investment with Cox-Ingersoll-Ross type mean reversion," Mathematical Social Sciences, Elsevier, vol. 59(3), pages 314-318, May.
    3. Loretta Mastroeni & Alessandro Mazzoccoli & Maurizio Naldi, 2022. "Pricing Cat Bonds for Cloud Service Failures," JRFM, MDPI, vol. 15(10), pages 1-18, October.
    4. Tim Leung & Xin Li & Zheng Wang, 2014. "Optimal Starting-Stopping and Switching of a CIR Process with Fixed Costs," Papers 1411.6080, arXiv.org.
    5. Matthew Lorig & Natchanon Suaysom, 2022. "Optimal times to buy and sell a home," Papers 2203.05545, arXiv.org, revised Mar 2022.
    6. Nowak, Piotr & Romaniuk, Maciej, 2013. "Pricing and simulations of catastrophe bonds," Insurance: Mathematics and Economics, Elsevier, vol. 52(1), pages 18-28.

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    More about this item

    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

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