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Hysteresis Models of Investment with Multiple Uncertainties and Exchange Rate Risk

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  • Martzoukos, Spiros H

Abstract

In this article we use the hysteresis model of investment developed by Brennan and Schwartz, and Dixit, and we extend it to capture the impact of interacting uncertainties on a firm with foreign operations. We develop a three-country, four-factor model where both continuous revenues and continuous costs are stochastic and are generated in countries other than the home country of the investor, who has to carry foreign currencies' risk. All four state-variables follow geometric Brownian motion processes. A critical assumption is made that the capital outlays for switching between the idle and the active states are constant fractions of the costs. An efficient numerical solution is used to demonstrate applications of the model on a multinational corporation facing operating and exchange rate risks in a multistage investment setting with interacting investment and operating options. Copyright 2001 by Kluwer Academic Publishers

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  • Martzoukos, Spiros H, 2001. "Hysteresis Models of Investment with Multiple Uncertainties and Exchange Rate Risk," Review of Quantitative Finance and Accounting, Springer, vol. 16(3), pages 251-267, May.
    • Handle: RePEc:kap:rqfnac:v:16:y:2001:i:3:p:251-67
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    Cited by:

    1. Chia-Chi Lu & Weifeng Hung & Jyh-Jian Sheu & Pai-Ta Shih, 2011. "Investment with network externality under uncertainty," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 555-564, May.
    2. VERMEULEN, Glen & KORT, Peter, 2014. "Real options and bank bailouts: How uncertainty affects optimal bank bailout policy," Working Papers 2014021, University of Antwerp, Faculty of Business and Economics.
    3. Wu-Lung Li & Kenneth Zheng, 2017. "Product market competition and cost stickiness," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 283-313, August.
    4. Imad Moosa, 2011. "The profitability of interest arbitrage when the base currency is pegged to a basket," Review of Quantitative Finance and Accounting, Springer, vol. 37(3), pages 267-281, October.
    5. Shu Feng & Chun-Yu Ho, 2016. "The real option approach to adoption or discontinuation of a management accounting innovation: the case of activity-based costing," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 835-856, October.
    6. Turvey, Calum G., 2002. "Can Hysteresis And Real Options Explain The Farmland Valuation Puzzle?," Working Papers 34131, University of Guelph, Department of Food, Agricultural and Resource Economics.

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