Threshold-type Policies for Real Options Using Regime-Switching Models

dc.contributor.ISNI0000 0001 1323 1180 (Bensoussan, A)
dc.contributor.LCNA2002119562‏ (Bensoussan, A)
dc.contributor.authorBensoussan, Alainen_US
dc.contributor.authorYan, Z.en_US
dc.contributor.authorYin, G.en_US
dc.date.accessioned2014-03-20T18:50:51Z
dc.date.available2014-03-20T18:50:51Z
dc.date.created2012-10-18en_US
dc.description.abstractTo investigate the impact of macroeconomic conditions on irreversible investments under a regime switching model, our main effort in this work is to rigorously justify the existence and uniqueness of optimal threshold-type policies. The underlying cash flow process is modeled as a geometric Brownian motion with return rate and volatility depending on a continuous-time Markov chain. The problem is similar to the American style of call options. When dealing either with American options in a financial market or with real options, a common practice in the literature is to postulate threshold-type strategies and to find the optimal threshold levels as solutions of systems of nonlinear algebraic equations. Although from a computational standpoint, this seems to be a reasonable approach, the issue of existence and uniqueness of solutions has never been addressed to date. Instead of assuming the threshold-type policies, this paper establishes that indeed the threshold-type policies are the right choice. Variational inequalities are used to characterize the optimal strategy by an abstract, nonconstructive reasoning. In addition, numerical simulations are also provided to demonstrate quantitative properties and properties of the systems. Copyright © 2012 by SIAM.en_US
dc.identifier.bibliographicCitationBensoussan, A., Z. Yan, and G. Yin. 2012. "Threshold-type policies for real options using regime-switching models." Siam Journal on Financial Mathematics 3(1): 667-689.en_US
dc.identifier.issn1945-497Xen_US
dc.identifier.issue1en_US
dc.identifier.startpage667en_US
dc.identifier.urihttp://hdl.handle.net/10735.1/3193
dc.identifier.volume3en_US
dc.relation.urihttp://dx.doi.org/10.1137/110833300en_US
dc.rights© 2012 Society for Industrial and Applied Mathematicsen_US
dc.source.journalSiam Journal on Financial Mathematicsen_US
dc.subjectMarkov processesen_US
dc.subjectMacroeconomics--Mathematical modelsen_US
dc.subjectReal options (Finance)en_US
dc.subjectVariational inequalities (Mathematics)en_US
dc.titleThreshold-type Policies for Real Options Using Regime-Switching Modelsen_US
dc.typetexten_US
dc.type.genrearticleen_US

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