Irreversibility and Interest Rates
The literature on irreversible investment fails to explore the relationship between the present value of alternative strategies and appropriate risk-adjusted interest rates. We attempt to fill this gap by showing that, to avoid arbitrage opportunities, the real option¡¦s rate must be higher than the rate of the immediate strategy. Further, we explain how irreversibility influences the risk-return combination of competing strategies acting as a pure risk factor.
Volume (Year): 5 (2006)
Issue (Month): 2 (August)
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- Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
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