scholarly journals INVESTMENT TIMING UNDER REGIME SWITCHING

2009 ◽  
Vol 12 (04) ◽  
pp. 443-463 ◽  
Author(s):  
ROBERT J. ELLIOTT ◽  
HONG MIAO ◽  
JIN YU
Keyword(s):  
Regime Switching ◽  
Real Option ◽  
Optimal Investment ◽  
Optimal Timing ◽  
Investment Timing ◽  
Investment Opportunities ◽  
Investment Cost ◽  
State Of The Economy ◽  
Information Sets ◽  
Option Model

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.

scholarly journals Optimal Investment and Financial Strategies under Tax-Rate Uncertainty

2011 ◽  
Vol 12 (4) ◽  
pp. 438-468
Author(s):  
Alessandro Fedele ◽  
Sergio Vergalli ◽  
Paolo M. Panteghini
Keyword(s):  
Real Option ◽  
Relevant Literature ◽  
Optimal Investment ◽  
Tax Rate ◽  
Investment Timing ◽  
Investment Projects ◽  
Debt Finance ◽  
Option Model ◽  
Financial Strategies ◽  
Representative Firm

AbstractIn this paper, we apply a real-option model to study the effects of tax-rate uncertainty on a firm’s decision. In doing so, we depart from the relevant literature, which focuses on fully equity-financed investment projects. By letting a representative firm borrow optimally, we show that debt finance not only encourages investment activities but can also substantially mitigate the effect of tax-rate uncertainty on investment timing.

scholarly journals Optimal Investment Timing and Size of a Logistics Park: A Real Options Perspective

Complexity ◽  
2017 ◽  
Vol 2017 ◽  
pp. 1-12 ◽  
Author(s):  
Dezhi Zhang ◽  
Jiehui Jiang ◽  
Shuangyan Li ◽  
Xiamiao Li ◽  
Qingwen Zhan
Keyword(s):  
Real Options ◽  
Real Option ◽  
Net Present Value ◽  
Optimal Investment ◽  
Optimal Timing ◽  
Logistics Park ◽  
Investment Timing ◽  
Government Subsidies ◽  
Investment Size ◽  
Logistics Demand

This paper uses a real options approach to address optimal timing and size of a logistics park investment with logistics demand volatility. Two important problems are examined: when should an investment be introduced, and what size should it be? A real option model is proposed to explicitly incorporate the effect of government subsidies on logistics park investment. Logistic demand that triggers the threshold for investment in a logistics park project is explored analytically. Comparative static analyses of logistics park investment are also carried out. Our analytical results show that (1) investors will select smaller sized logistics parks and prepone the investment if government subsidies are considered; (2) the real option will postpone the optimal investment timing of logistics parks compared with net present value approach; and (3) logistic demands can significantly affect the optimal investment size and timing of logistics park investment.

Optimal investment with time-varying transition probabilities for regime switching

2021 ◽  
Vol 29 (2) ◽  
pp. 102-115
Author(s):  
Hyo-Chan Lee ◽  
Seyoung Park ◽  
Jong Mun Yoon
Keyword(s):  
Regime Switching ◽  
Transition Probabilities ◽  
Optimal Investment ◽  
Cash Flows ◽  
Optimal Timing ◽  
Time Varying ◽  
Content Type ◽  
Stochastic Nature ◽  
Optimal Thresholds

Abstract This study aims to generalize the following result of McDonald and Siegel (1986) on optimal investment: it is optimal for an investor to invest when project cash flows exceed a certain threshold. This study presents other results that refine or extend this one by integrating timing flexibility and changes in cash flows with time-varying transition probabilities for regime switching. This study emphasizes that optimal thresholds are either overvalued or undervalued in the absence of time-varying transition probabilities. Accordingly, the stochastic nature of transition probabilities has important implications to the search for optimal timing of investment.

scholarly journals Missed Opportunities: Optimal Investment Timing When Information is Costly

2007 ◽  
Vol 42 (2) ◽  
pp. 467-488 ◽  
Author(s):  
Graeme Guthrie
Keyword(s):  
Real World ◽  
Real Option ◽  
Optimal Investment ◽  
Investment Opportunity ◽  
Missed Opportunities ◽  
Investment Timing ◽  
Real Option Analysis ◽  
Amount Of Information ◽  
Optimal Delay

AbstractReal option analysis typically assumes that projects are continuously evaluated and launched at precisely the time determined to be optimal, but real world projects cannot be managed in this way because of the costs of formally evaluating an investment opportunity. This paper shows that immediate investment is more attractive if evaluation costs are high or the amount of information to be revealed by an evaluation is large. The optimal delay until a reevaluation is long if evaluation costs are high or the amount of information to be revealed by an evaluation is small. The reduction in the value of project rights is especially severe when the value of the completed project is strongly mean reverting because then precision in investment timing is particularly important.

OPTIMAL INVESTMENT FOR A DEFINED-CONTRIBUTION PENSION SCHEME UNDER A REGIME SWITCHING MODEL

2015 ◽  
Vol 45 (2) ◽  
pp. 397-419 ◽  
Author(s):  
An Chen ◽  
Łukasz Delong
Keyword(s):  
Asset Allocation ◽  
Regime Switching ◽  
Pension Plan ◽  
Optimal Investment ◽  
Investment Strategy ◽  
Switching Behavior ◽  
Pension Scheme ◽  
Defined Contribution ◽  
State Of The Economy ◽  
Plan Member

AbstractWe study an asset allocation problem for a defined-contribution (DC) pension scheme in its accumulation phase. We assume that the amount contributed to the pension fund by a pension plan member is coupled with the salary income which fluctuates randomly over time and contains both a hedgeable and non-hedgeable risk component. We consider an economy in which macroeconomic risks are existent. We assume that the economy can be in one ofIstates (regimes) and switches randomly between those states. The state of the economy affects the dynamics of the tradeable risky asset and the contribution process (the salary income of a pension plan member). To model the switching behavior of the economy we use a counting process with stochastic intensities. We find the investment strategy which maximizes the expected exponential utility of the discounted excess wealth over a target payment, e.g. a target lifetime annuity.

scholarly journals The Effects of Abandonment Options on Investment Timing and Profit Sharing of FDI

2017 ◽  
Vol 2017 ◽  
pp. 1-11
Author(s):  
Weiwei Zhang ◽  
Minggao Xue
Keyword(s):  
Foreign Direct Investment ◽  
Direct Investment ◽  
Real Option ◽  
Optimal Investment ◽  
International Investment ◽  
Profit Sharing ◽  
Negative Effects ◽  
Investment Timing ◽  
Real Option Method ◽  
Profit Share

The paper incorporates cooperative game theory into a real option method in a foreign direct investment setting and examines the operational decisions of a multinational corporation in a cooperative framework, where the corporation is endowed with an abandonment option and shares its profit with the host country. In particular, we investigate how the abandonment options affect the optimal investment timing and the optimal profit share of a foreign direct investment using a real option game method. We show that the flexibility of the abandonment option induces the corporation to investment earlier, which indicates the negative effects on investment trigger. The result is consistent with intuition since the abandonment option provides insurance and thus reduces the overall risk of the project. We also find that the introduction of the abandonment option reduces the optimal profit share in a cooperative framework and in turn the lower profit share increases the investment trigger, thereby having a positive effect on the investment threshold to hinder the investment. By numerical analysis, we find that the overall effect of the abandonment options is inversely related to the investment trigger. These findings provide quantitative analysis about the decisions regarding cooperation in international investment extraction projects.

A jump-diffusion real option approach for hotel investment under uncertain lodging demand

Kybernetes ◽  
2016 ◽  
Vol 45 (10) ◽  
pp. 1604-1616 ◽  
Author(s):  
Rufei Ma ◽  
Pengxiang Zhai
Keyword(s):  
Real Option ◽  
Economic Recession ◽  
Optimal Investment ◽  
Jump Diffusion ◽  
Discounted Cash Flow ◽  
Content Type ◽  
Investment Timing ◽  
Real Option Approach ◽  
Hotel Investment ◽  
The Impact

Purpose One of the important characteristics of the hotel business is uncertainty of lodging demand, which can jeopardize hotel operation and ultimately even threaten a hotel’s survival during an economic recession. The purpose of this paper is to propose an approach to determine optimal hotel investment issues under uncertain lodging demand. Design/methodology/approach Uncertainty of lodging demand is classified into two types: the impact of unexpected economic recession and the temporary imbalance between supply of hotel rooms and lodging demand. A jump-diffusion real option approach is proposed to analyze how these two types affect optimal investment timing and the potential value of new hotel projects. The case of hotel investment in Macao is used to illustrate the jump-diffusion real option approach. Findings The results of numerical analysis show that the uncertainty induced by temporary imbalance between supply of hotel rooms and lodging demand increases the threshold of investment and hotel value, while the uncertainty induced by unexpected economic recession has ambiguous effects on the value and optimal investment timing of new hotel projects. Practical implications The jump-diffusion real option approach increases managerial flexibility for managers when making investment decisions on new hotel projects, allowing greater value to be generated than is possible with the conventional discounted cash flow method. Originality/value The approach separates the impact of unexpected economic recession on lodging demand from that of “normal” fluctuations in lodging demand, and it considers the impact of both types of uncertainty on hotel investment.

scholarly journals Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach

Energies ◽  
2018 ◽  
Vol 11 (11) ◽  
pp. 2954 ◽  
Author(s):  
Jia-Yue Huang ◽  
Yun-Fei Cao ◽  
Hui-Ling Zhou ◽  
Hong Cao ◽  
Bao-Jun Tang ◽  
...  
Keyword(s):  
Real Option ◽  
Oil Prices ◽  
Optimal Investment ◽  
Oil Price ◽  
Uncertain Environments ◽  
Investment Timing ◽  
Oil Companies ◽  
Geological Conditions ◽  
Real Option Approach ◽  
The Impact

This article presents a real option model for helping investors to determine the optimal investment timing and scale of overseas oil projects. The model is suitable for the highly uncertain environments in which many oil companies operate, where they have to suspend upstream investment, stop new oilfield construction, and wait for proper oil prices in order to avoid losses. Considering the uncertainty of oil prices and exchange rates, the results of analytical solutions presented in this paper show the critical oil price that can be seen as the investment threshold for triggering oilfield development as well as the optimal recoverable factor for every oil price level to indicate the optimal investment scale. Results of the case project show the critical oil price, which is 82.32 US dollar per barrel, and the selection of optimal investment scale. The article also demonstrates the impact of investment scale on investment timing in overseas oil projects. The policy implication from the case project is that investment decisions are finitely impacted by geological conditions. Besides, the existence of tax holiday directly contributes to a lower investment threshold. In addition, reducing unit operation cost can obviously enlarge optimal investment scale and initiate oil projects in a relatively low level of investment threshold.

COMPUTING COMPETENCIES VALUE THROUGH A FUZZY REAL OPTION MODEL

2004 ◽  
Vol 09 (01) ◽  
Author(s):  
Lorella Cannavacciuolo ◽  
Luigi Iervolino ◽  
Luca Iandoli ◽  
Giuseppe Zollo
Keyword(s):  
Real Option ◽  
Option Model

Price and subsidy under uncertainty: Real-option approach to optimal investment decisions on energy storage with solar PV

2021 ◽  
pp. 0958305X2199229
Author(s):  
Jingyu Qu ◽  
Wooyoung Jeon
Keyword(s):  
Renewable Energy ◽  
Energy Storage ◽  
Real Option ◽  
Financial Burden ◽  
Investment Decisions ◽  
Optimal Investment ◽  
Investment Incentives ◽  
Solar Pv ◽  
Increased Risk ◽  
Trigger Price

Renewable generation sources still have not achieved economic validity in many countries including Korea, and require subsidies to support the transition to a low-carbon economy. An initial Feed-In Tariff (FIT) was adopted to support the deployment of renewable energy in Korea until 2011 and then was switched to the Renewable Portfolio Standard (RPS) to implement more market-oriented mechanisms. However, high volatilities in electricity prices and subsidies under the RPS scheme have weakened investment incentives. In this study we estimate how the multiple price volatilities under the RPS scheme affect the optimal investment decisions of energy storage projects, whose importance is increasing rapidly because they can mitigate the variability and uncertainty of solar and wind generation in the power system. We applied mathematical analysis based on real-option methods to estimate the optimal trigger price for investment in energy-storage projects with and without multiple price volatilities. We found that the optimal trigger price of subsidy called the Renewable Energy Certificate (REC) under multiple price volatilities is 10.5% higher than that under no price volatilities. If the volatility of the REC price gets doubled, the project requires a 26.6% higher optimal investment price to justify the investment against the increased risk. In the end, we propose an auction scheme that has the advantage of both RPS and FIT in order to minimize the financial burden of the subsidy program by eliminating subsidy volatility and find the minimum willingness-to-accept price for investors.

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