Regime uncertainty and optimal investment timing

Katsumasa Nishide and Ernesto Kazuhiro Nomi

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 10, pages 1796-1807

Abstract: We construct a real options model in which a regime change is expected at a pre-determined future time and study the effects of regime uncertainty on a firm's strategic investment decision, taking into consideration the remaining time to the regime change and the probability of each regime state. We show that just before the time of a regime change, firms should act as if the worst-case scenario was about to happen, even if a good state is highly possible.

Keywords: Investment; timing; Real; options; Policy; change; Regime; uncertainty (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:10:p:1796-1807

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