Arbeitspapier

Irreversible investment under interest rate variability: new results

The current literature on irreversible investment decisions usually makes the assumption of a constant interest rate.We study the impact of interest rate and revenue variability on the decision to carry out an irreversible investment project.Given the generality of the valuation problem considered, we first provide a thorough mathematical characterization of the two-dimensional optimal stopping problem and develop some new results.We establish that interest rate variability has a profound decelerating or accelerating impact on investment demand depending on whether the current interest rate is below or above the long run steady state interest rate, and that its quantitative size may be very large. Allowing for interest rate uncertainty is shown to decelerate rational investment demand by raising both the required exercise premium of the irreversible investment opportunity and the value of waiting.Finally, we demonstrate that increased revenue volatility strengthens the negative impact of interest rate uncertainty and vice versa.

ISBN
952-462-096-0
Sprache
Englisch

Erschienen in
Series: Bank of Finland Discussion Papers ; No. 29/2003

Klassifikation
Wirtschaft
Renewable Resources and Conservation: Forestry
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Optimization Techniques; Programming Models; Dynamic Analysis
Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
Thema
irreversible investment
variable interest rates
free boundary problems

Ereignis
Geistige Schöpfung
(wer)
Alvarez, Luis H. R.
Koskela, Erkki
Ereignis
Veröffentlichung
(wer)
Bank of Finland
(wo)
Helsinki
(wann)
2003

Handle
Letzte Aktualisierung
10.03.2025, 11:41 MEZ

Datenpartner

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Objekttyp

  • Arbeitspapier

Beteiligte

  • Alvarez, Luis H. R.
  • Koskela, Erkki
  • Bank of Finland

Entstanden

  • 2003

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