IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Irreversible Investment under Interest Rate Variability: Some Generalizations

  • Alvarez, Luis H.R.
  • Koskela, Erkki

We study the impact of interest rate and revenue variability on the decision to carry out irreversible investment. We provide a mathematical characterization of the two-dimensional optimal stopping problem and show that interest rate variability has a decelerating or accelerating impact on investment depending on whether the current interest rate is below or above the long-run steady state. Allowing for interest rate volatility decelerates investment by raising both the required exercise premium of the investment opportunity and the value of waiting. Finally, increased revenue volatility is shown to strengthen the negative impact of interest rate volatility and vice versa.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 841.

in new window

Length: 27 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:rif:dpaper:841
Contact details of provider: Postal: Lönnrotinkatu 4 B, FIN-00120 HELSINKI
Phone: +358 (0)9 609 900
Fax: +358 (0)9 601 753
Web page:

More information through EDIRC

Order Information: Email:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Yaozhong Hu & Bernt Øksendal, 1998. "Optimal time to invest when the price processes are geometric Brownian motions," Finance and Stochastics, Springer, vol. 2(3), pages 295-310.
  2. Cabalero, R.J., 1997. "Aggregaete Investment," Working papers 97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Alvarez, Luis H. R. & Koskela, Erkki, 2005. "Wicksellian theory of forest rotation under interest rate variability," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 529-545, March.
  4. Anders ûksendal, 2000. "Irreversible investment problems," Finance and Stochastics, Springer, vol. 4(2), pages 223-250.
  5. Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
  6. 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.
  7. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March.
  8. Ioannis Karatzas & Fridrik M. Baldursson, 1996. "Irreversible investment and industry equilibrium (*)," Finance and Stochastics, Springer, vol. 1(1), pages 69-89.
  9. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
  10. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
  11. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 85-106.
  12. Stephen Nickell, 1974. "On the Role of Expectations in the Pure Theory of Investment," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 1-19.
  13. Robert C. Merton, 1975. "An Asymptotic Theory of Growth Under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 42(3), pages 375-393.
  14. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  15. repec:bla:restud:v:63:y:1996:i:4:p:581-93 is not listed on IDEAS
  16. 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.
  17. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
  18. Andrew B. Abel & Janice C. Eberly, 1996. "Optimal Investment with Costly Reversibility," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 581-593.
  19. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  20. Nickell, Stephen J, 1974. "On Expectations, Government Policy and the Rate of Investment," Economica, London School of Economics and Political Science, vol. 41(163), pages 241-55, August.
  21. Michel Demers, 1991. "Investment under Uncertainty, Irreversibility and the Arrival of Information Over Time," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 333-350.
  22. Guiseppe Bertola & Ricardo J. Caballero, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 223-246.
  23. Baldwin, Carliss Y, 1982. " Optimal Sequential Investment When Capital Is Not Readily Reversible," Journal of Finance, American Finance Association, vol. 37(3), pages 763-82, June.
  24. Cukierman, Alex, 1980. "The Effects of Uncertainty on Investment under Risk Neutrality with Endogenous Information," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 462-75, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:rif:dpaper:841. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kaija Hyvönen-Rajecki)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.