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Competitive investment with varying risk premia

Fredrik Armerin () and Åke Gunnelin ()
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Fredrik Armerin: Department of Real Estate and Construction Management, Royal Institute of Technology, Postal: Teknikringen 10B, 100 44 Stockholm, Sweden
Åke Gunnelin: Department of Real Estate and Construction Management, Royal Institute of Technology, Postal: Teknikringen 10B, 100 44 Stockholm, Sweden

No 19/12, Working Paper Series from Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance

Abstract: This paper considers a model with a time-varying risk premium. The risk premium is driven by a continuous time Markov chain, representing the state in the economy, and the stochastic process generating the cash flows is a Markov-modulated geometric Brownian motion. An existing firm is facing the possibility of competitors entering the market, and due to this, cash flows are limited at levels which are dependent on the state of the economy. This results in a regulated Markov-modulated geometric Brownian motion, and the resulting accumulated supply can have jumps, something that is not possible in a model with only one regime.

Keywords: valuation; competition; Markov-modulated Brownian motion; regulated processes (search for similar items in EconPapers)
JEL-codes: G11 G13 G30 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2019-12-20
New Economics Papers: this item is included in nep-ore and nep-upt
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