Irreversible investment under interest rate variability : new results

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dc.contributor Suomen Pankki
dc.contributor.author Alvarez, Luis H. R.
dc.contributor.author Koskela, Erkki
dc.date.accessioned 2014-09-22T07:58:24Z
dc.date.available 2014-09-22T07:58:24Z
dc.date.issued 2003
dc.identifier.isbn 952-462-096-0
dc.identifier.issn 0785-3572
dc.identifier.uri https://helda.helsinki.fi/bof/handle/123456789/7627
dc.description.abstract 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. Key words: irreversible investment, variable interest rates, free boundary problems JEL classification numbers: Q23, G31, C61 AMS classification numbers: 91B76, 49K15, 49J15
dc.format.extent 27 s.
dc.language.iso eng
dc.rights https://helda.helsinki.fi/bof/copyright
dc.subject investoinnit
dc.subject korot
dc.subject epävarmuus
dc.subject SP
dc.title Irreversible investment under interest rate variability : new results
dc.type Sarjajulkaisu
dc.identifier.urn URN:NBN:fi:bof-20140807400
dc.subject.jel Q23
dc.subject.jel G31
dc.subject.jel C61
dc.subject.jel J15
dc.series.name Suomen Pankin keskustelualoitteita
dc.series.year 2003
dc.series.number 29/2003
dc.series.sortingnumber 29
dc.date.publication 12.11.2003
dc.description.publication Published in Journal of Business, 79, 2, March 2006: 623-644

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