The Theory of Optimal Investment in Information Security and Adjustment Costs: An Impulse Control Approach

Makoto Goto and Ken-ichi Tatsumi
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Makoto Goto: Graduate School of Economics and Business Administration, Hokkaido University, Kita 9, Nishi 7, Kita-ku, Sapporo 060-0809, Japan
Ken-ichi Tatsumi: Faculty of Economics, Gakushuin University, Mejiro 1-5-1, Toshima-ku, Tokyo 171-8588, Japan

Chapter 5 in Recent Advances in Financial Engineering 2011, 2012, pp 73-96 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper applies the theory of real options and impulse control to information security investment and derives properties of an optimal investment rule. It also incorporates adjustment costs incurred whenever the level of the investment changes. We observe among others that if firm has opportunity of multiple investments, it behaves so cautiously that the timing is earlier and to invest more. Both adjustment costs and volatility of threat make interval of the investment longer, while vulnerability leads to shorter interval and therefore frequent investment.

Keywords: Financial Engineering; Mathematical Finance; Money & Banking; Risk Management; Real Option; Corporate Finance; Computational Finance (search for similar items in EconPapers)
Date: 2012
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