Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty

Yu-Fu Chen and Michael Funke

No 225, Dundee Discussion Papers in Economics from Economic Studies, University of Dundee

Abstract: The paper studies the interaction between cyclical uncertainty and investment in a stochastic real option framework where demand shifts stochastically between three different states, each with different rates of drift and volatility. In our setting the shifts are governed by a three-state Markov switching model with constant transition probabilities. The magnitude of the link between cyclical uncertainty and investment is quantified using simulations of the model. The chief implication of the model is that recessions and financial turmoil are important catalysts for waiting. In other words, our model shows that macroeconomic risk acts as an important deterrent to investments.

Keywords: Business Cycles; Real Options; Investment; Markov Switching; Tobin’s q; Uncertainty (search for similar items in EconPapers)
JEL-codes: D81 D92 E32 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2009-06
New Economics Papers: this item is included in nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.dundee.ac.uk/media/dundeewebsite/econom ... cussion/DDPE_225.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_225.pdf [301 Moved Permanently]--> https://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_225.pdf)

Related works:
Journal Article: BOOMS, RECESSIONS AND FINANCIAL TURMOIL: A FRESH LOOK AT INVESTMENT DECISIONS UNDER CYCLICAL UNCERTAINTY (2010)
Working Paper: Booms, recessions and financial turmoil: A fresh look at investment decisions under cyclical uncertainty (2010)
Working Paper: Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty (2009)
Working Paper: Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty (2009)
Working Paper: Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty (2009)
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:dun:dpaper:225

Access Statistics for this paper

More papers in Dundee Discussion Papers in Economics from Economic Studies, University of Dundee Contact information at EDIRC.
Bibliographic data for series maintained by Andrzej Kwiatkowski ().