Optimal timing of investments modeled as perpetual American options in a Levy market

Ini Adinya and G. O. S. Ekhaguere ()
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Ini Adinya: Department of Mathematics, University of Ibadan, Ibadan, Nigeria
G. O. S. Ekhaguere: Department of Mathematics, University of Ibadan, Ibadan, Nigeria

International Journal of Financial Engineering (IJFE), 2022, vol. 09, issue 01, 1-27

Abstract: Using a real option approach, this paper models an arbitrary real life investment, which typically has a long maturity date, as a perpetual American call option in a Levy market. Expressions for the moments, characteristic function and infinitesimal generator of the associated jump-diffusion Levy process, defined by two independent compound Poisson processes and two correlated standard Brownian motions, are derived and these fundamental results are employed to determine the optimal time for investment. An application of the results to a Build Operate and Transfer investment is furnished.

Keywords: Levy processes; real options; investment; infinitesimal generators; optimal stopping (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S2424786321500250

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