Investment Timing under Incomplete Information
We study the decision of when to invest in an indivisible project whose value is perfectly observable but driven by a parameter that is unknown to the decision maker ex ante. This problem is equivalent to an optimal stopping problem for a bivariate Markov process. Using filtering and martingale techniques, we show that the optimal investment region is characterised by a continuous and non-decreasing boundary in the value/belief state space. This generates path-dependency in the optimal investment strategy. We further show that the decision maker always benefits from an uncertain drift relative to an 'average' drift situation. However, a local study of the investment boundary reveals that the value of the option to invest is not globally increasing with respect to the volatility of the value process.
(This abstract was borrowed from another version of this item.)
|Date of creation:||2000|
|Date of revision:||Apr 2004|
|Publication status:||Published in Mathematics of Operations Research, vol. 30, n. 2, May 2005, p. 472-500.|
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