Irreversibility and Interest Rates

Giuseppe Travaglini

International Journal of Business and Economics, 2006, vol. 5, issue 2, 173-183

Abstract: The literature on irreversible investment fails to explore the relationship between the present value of alternative strategies and appropriate risk-adjusted interest rates. We attempt to fill this gap by showing that, to avoid arbitrage opportunities, the real option¡¦s rate must be higher than the rate of the immediate strategy. Further, we explain how irreversibility influences the risk-return combination of competing strategies acting as a pure risk factor.

Keywords: irreversibility; real option; risk-adjusted rate (search for similar items in EconPapers)
JEL-codes: D92 E22 G12 (search for similar items in EconPapers)
Date: 2006
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