Optimal investment with time-varying transition probabilities for regime switching

This study aims to generalize the following result of McDonald and Siegel (1986) on optimal investment: it is optimal for an investor to invest when project cash flows exceed a certain threshold. This study presents other results that refine or extend this one by integrating timing flexibility and c...

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Veröffentlicht in:Journal of Derivatives and Quantitative Studies: 선물연구 2021-06, Vol.29 (2), p.102-115
1. Verfasser: Lee, Hyo-Chan
Format: Artikel
Sprache:eng
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Zusammenfassung:This study aims to generalize the following result of McDonald and Siegel (1986) on optimal investment: it is optimal for an investor to invest when project cash flows exceed a certain threshold. This study presents other results that refine or extend this one by integrating timing flexibility and changes in cash flows with time-varying transition probabilities for regime switching. This study emphasizes that optimal thresholds are either overvalued or undervalued in the absence of time-varying transition probabilities. Accordingly, the stochastic nature of transition probabilities has important implications to the search for optimal timing of investment.
ISSN:1229-988X
2713-6647
DOI:10.1108/JDQS-12-2020-0032