A NOTE ON IRREVERSIBLE INVESTMENT, HEDGING AND OPTIMAL CONSUMPTION PROBLEMS

Vicky Henderson () and David Hobson ()
Additional contact information
Vicky Henderson: Bendheim Center for Finance and ORFE, Princeton University, Princeton, NJ 08544, USA
David Hobson: Department of Mathematical Sciences, University of Bath, Bath, BA2 7AY, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 06, 997-1007

Abstract: A canonical problem in real option pricing, as described in the classic text of Dixit and Pindyck [2], is to determine the optimal time to invest at a fixed cost, to receive in return a stochastic cashflow. In this paper we are interested in this problem in an incomplete market where the cashflow is not spanned by the traded assets. We follow the formulation in Miao and Wang [21]; our contribution is to show that significant progress can be made in solving the Hamilton-Jacobi-Bellman equation and that the optimal exercise threshold can be characterized quite precisely.

Keywords: Real options; incomplete markets; optimal stopping; optimal control; risk aversion (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S021902490600386X
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:09:y:2006:i:06:n:s021902490600386x

Ordering information: This journal article can be ordered from

DOI: 10.1142/S021902490600386X

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().