Irreversible investment with Cox-Ingersoll-Ross type mean reversion

Christian-Oliver Ewald and Wen-Kai Wang

Mathematical Social Sciences, 2010, vol. 59, issue 3, 314-318

Abstract: We solve a Dixit and Pindyck type irreversible investment problem in continuous time under the assumption that the project value follows a Cox-Ingersoll-Ross process. This setup works well for modeling foreign direct investment in the framework of real options, when the exchange rate is uncertain and the project value fixed in a foreign currency. We indicate how the solution qualitatively differs from the two classical cases: geometric Brownian motion and geometric mean reversion. Furthermore, we discuss analytical properties of the Cox-Ingersoll-Ross process and demonstrate potential advantages of this process as a model for the project value with regard to the classical ones.

Keywords: Irreversible; investment; Real; options; Models; of; mean; reversion; Optimal; control; Cox-Ingersoll-Ross; process; Foreign; direct; investment (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:59:y:2010:i:3:p:314-318

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