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
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952-462-096-0
- Language
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Englisch
- Bibliographic citation
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Series: Bank of Finland Discussion Papers ; No. 29/2003
- Classification
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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
- Subject
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irreversible investment
variable interest rates
free boundary problems
- Event
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Geistige Schöpfung
- (who)
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Alvarez, Luis H. R.
Koskela, Erkki
- Event
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Veröffentlichung
- (who)
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Bank of Finland
- (where)
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Helsinki
- (when)
-
2003
- Handle
- Last update
-
10.03.2025, 11:41 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Alvarez, Luis H. R.
- Koskela, Erkki
- Bank of Finland
Time of origin
- 2003
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