Good timing: The economics of optimal stopping

Graham Davis and Robert Cairns

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 2, 255-265

Abstract: This paper presents an economic interpretation of the optimal “stopping” of perpetual project opportunities under both certainty and uncertainty. Prior to stopping, the expected rate of return from delay exceeds the rate of interest. The expected rate of return from delay is the sum of the expected rate of change in project value and the expected rate of change in the option premium associated with waiting. At stopping the expected rate of return from delay has fallen to the rate of interest. Viewing stopping in this way unifies the theoretical and practical insights of the theory of stopping under certainty and uncertainty.

Keywords: Investment timing; r-Percent rule; Real options; Investment under uncertainty; Wicksell (search for similar items in EconPapers)
JEL-codes: C61 D92 E22 G12 G13 G31 Q00 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:2:p:255-265

DOI: 10.1016/j.jedc.2011.09.008

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