Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-11-28T04:42:40.207Z Has data issue: false hasContentIssue false
  • English
  • Français

An investment model with entry and exit decisions

Part of: Stochastic systems and control

Published online by Cambridge University Press:  14 July 2016

J. Kate Duckworth  and
Mihail Zervos
J. Kate Duckworth*
Affiliation:
University of Newcastle
Mihail Zervos*
Affiliation:
King's College London
*
∗Postal address: Department of Statistics, School of Mathematics and Statistics, University of Newcastle, Newcastle upon Tyne NE1 7RU, UK. Email address: [email protected]
∗∗Postal address: Department of Mathematics, King's College London, The Strand, London WC2R 2LS, UK. Email adress:[email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We consider an investment model which generalizes a number of models that have been studied in the literature. The model involves entry and exit decisions as well as decisions relating to production scheduling. We then address the problem of its valuation from the standpoint of the dynamic programming approach. Our analysis results in a closed form analytic solution that can take qualitatively different forms depending on parameter values.

Keywords

Stochastic controloptimal stoppingreal assets

MSC classification

Primary: 93E20: Optimal stochastic control 93E03: Stochastic systems, general
Type
Research Papers
Information
Journal of Applied Probability , Volume 37 , Issue 2 , June 2000 , pp. 547 - 559
Copyright
Copyright © by the Applied Probability Trust 2000 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bertsekas, D. P., and Shreve, S. E. (1978). Stochastic Optimal Control: the Discrete Time Case. Academic Press, New York.Google Scholar
Brekke, K. A. and Øksendal, B. (1994). Optimal switching in an economic activity under uncertainty. SIAM J. Contr. Opt. 32, 1021–1036.Google Scholar
Brennan, M. J., and Schwartz, E. S. (1985). Evaluating natural resource investments. J. Business 58, 135–157.CrossRefGoogle Scholar
Cortazar, G., and Schwartz, E. S. (1993). A compound option model of production and intermediate inventories. J. Business 66, 517–540.CrossRefGoogle Scholar
Dixit, A. K. (1989). Entry and exit decisions under uncertainty. J. Political Econ. 97, 620–638.Google Scholar
Dixit, A. K., and Pindyck, R.S. (1994). Investment under Uncertainty. Princeton University Press, NJ.Google Scholar
Karatzas, I., and Shreve, S. E. (1988). Brownian Motion and Stochastic Calculus. Springer, New York.Google Scholar
Knudsen, T. S., Meister, B., and Zervos, M. (1998). Valuation of investments in real assets with implications for the stock prices. SIAM J. Contr. Opt. 36, 2082–2102.Google Scholar
Knudsen, T. S., Meister, B., and Zervos, M. (1999). On the relationship of the dynamic programming approach and the contingent claim approach to asset valuation. Finance & Stochastics III, pp. 433–449.Google Scholar
McDonald, R. L., and Siegel, D. R. (1985). Investment and the valuation of firms when there is an option to shut down. Int. Econ. Rev. 26, 331–349.CrossRefGoogle Scholar
Paddock, J. L., Siegel, D. R., and Smith, J. L. (1988). Option valuation of claims on real assets: the case of offshore petroleum leases. Quart. J. Economics 8, 479–508.Google Scholar
Pindyck, R. S. (1988). Irreversible investment, capacity choice, and the value of the firm. Amer. Econ. Rev. 79, 969–985.Google Scholar
Revuz, D., and Yor, M. (1991). Continuous Martingales and Brownian Motion. Springer, New York.Google Scholar
Shirakawa, H. (1997). Evaluation of investment opportunity under entry and exit decisions. Mathematical Analysis in Economics, Surikaisekikenkyusho Kokyuroku 987, 107–124.Google Scholar