Firm decisions under jump-diffusive dynamics

Arbeitspapier

We present a model of firm investment under uncertainty and partial irreversibility in which uncertainty is represented by a jump diffusion. This allows to represent both the continuous Gaussian volatility and the discontinuous uncertainty related to information arrival, sudden changes and large shocks. The model shows how both sources of uncertainty negatively impact the optimal investment and disinvestment policies, and how the presence oflarge negative jumps can drastically affect the firm's ability to recover. Our results show that the standard Gaussian framework consistently underestimates the negative effect of uncertainty on firm investment decisions. We test these predictions on a panel dataset of UK firms: we first structurally estimate the uncertainty parameters using multinomial maximum likelihood and differential evolution techniques and subsequently study their impact on firm investment rates, validating our model predictions.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Graduate Institute of International and Development Studies Working Paper ; No. HEIDWP04-2019

Classification and Topics

• Classification: Wirtschaft ; Optimization Techniques; Programming Models; Dynamic Analysis ; Existence and Stability Conditions of Equilibrium ; Firm Behavior: Theory ; Firm Behavior: Empirical Analysis
• Subject: firm investment ; uncertainty ; jump diffusions ; partial irreversibility ; real options

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Deopa, Neha ; Rinaldo, Daniele
• Event: Veröffentlichung
• (who): Graduate Institute of International and Development Studies
• (where): Geneva
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/201700
• Last update: 10.03.2025, 11:41 AM CET