Analytical solution for an investment problem under uncertainties with shocks

Cláudia Nunes and Rita Pimentel

European Journal of Operational Research, 2017, vol. 259, issue 3, 1054-1063

Abstract: We derive the optimal investment decision in a project where both demand and investment cost are stochastic processes, eventually subject to shocks. We extend the approach used in Dixit and Pindyck (1994) to deal with two sources of uncertainty and we assume that the underlying processes are jump diffusion processes. Assuming certain conditions on the parameters, we are able to derive a closed expression for the value of the firm. Finally, we present comparative statics for the investment threshold with respect to the relevant parameters.

Keywords: Markov processes; Jump-diffusion process; Investment decision; Optimal stopping time problem (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:259:y:2017:i:3:p:1054-1063

DOI: 10.1016/j.ejor.2017.01.008

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