INVESTMENT TIMING UNDER REGIME SWITCHING

Robert J. Elliott (), Hong Miao and Jin Yu ()
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Robert J. Elliott: Haskayne School of Business, University of Calgary, Calgary, AB T2N1N4, Canada;
Jin Yu: Vienna Graduate School of Finance, Heiligenstaedter Strasse 46–48, 1190 Vienna, Austria

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 04, 443-463

Abstract: We investigate the optimal investment timing strategy in a real option framework. Depending on the state of the economy, whose changes are modeled by a Markov chain, the investment cost can take one of two values. The optimal investment timing decision is determined by finding the free boundary of a perpetual American option. Three investment timing policies, based on different assumptions of investors' information sets, are determined and compared. In the full information case, a significantly earlier optimal exercising time is indicated. We show that an optimal-timing policy suggested by the conventional real option model might ruin the investment opportunities.

Keywords: Regime switching; real option; investment timing (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024909005361

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