Numerical solution of the sequential investment model: a note on Dixit and Pindyck's (1994) analysis

R. H. Berry and S. X. Zuo

The European Journal of Finance, 2010, vol. 16, issue 8, 743-752

Abstract: This paper discusses the model and solution approach adopted by Majd and Pindyck (1987. Time to build, option value, and investment decisions. Journal of Financial Economics 18, March: 7-27) and Dixit and Pindyck (1994. Investment under uncertainty. Princeton, NJ: Princeton University Press), when considering the sequential investment decision. It is shown that specific results presented in these two sources are based on invalid solutions to the relevant partial differential equation. The problem stems from the possibility that economically feasible parameter values and apparently acceptable step sizes for the explicit finite difference approach used can combine to generate non-convergent, invalid solutions.

Keywords: real options; sequential investment; time to build; stability and convergence; explicit finite difference; sensitivity analysis (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/13518470903314469 (text/html)
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:taf:eurjfi:v:16:y:2010:i:8:p:743-752

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/13518470903314469

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().