On an irreversible investment problem with two-factor uncertainty

Arbeitspapier

We consider a real options model for the optimal irreversible investment problem of a profit maximizing company. The company has the opportunity to invest into a production plant capable of producing two products, of which the prices follow two independent geometric Brownian motions. After paying a constant sunk investment cost, the company sells the products on the market and thus receives a continuous stochastic revenue-flow. This investment problem is set as a twodimensional optimal stopping problem. We find that the optimal investment decision is triggered by a convex curve, which we characterize as the unique continuous solution to a nonlinear integral equation. Furthermore, we provide analytical and numerical comparative statics results of the dependency of the project's value and investment decision with respect to the model's parameters.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Center for Mathematical Economics Working Papers ; No. 646

Classification and Topics

• Classification: Wirtschaft ; Portfolio Choice; Investment Decisions ; Optimization Techniques; Programming Models; Dynamic Analysis ; Intertemporal Firm Choice: Investment, Capacity, and Financing
• Subject: Real Options ; Irreversible Investment ; Optimal Stopping ; Nonlinear Integral Equation ; Comparative Statics

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dammann, Felix ; Ferrari, Giorgio
• Event: Veröffentlichung
• (who): Bielefeld University, Center for Mathematical Economics (IMW)
• (where): Bielefeld
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/238124
• URN: urn:nbn:de:0070-pub-29528604
• Last update: 10.03.2025, 11:41 AM CET