Investment timing with regime switching
Date
2008-01-17
Authors
Elliott, Robert J., author
Miao, Hong, author
Yu, Jin, author
International Journal of Theoretical and Applied Finance, publisher
Journal Title
Journal ISSN
Volume Title
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.
Description
Includes bibliographical references (pages 29-31).
Published as: International Journal of Theoretical and Applied Finance, vol. 12, no. 4, pp. 443-463, 2009, https://doi.org/10.1142/S0219024909005361.
Published as: International Journal of Theoretical and Applied Finance, vol. 12, no. 4, pp. 443-463, 2009, https://doi.org/10.1142/S0219024909005361.
Rights Access
Subject
regime switching
real option
investment timing