Optimal investment with time-varying transition probabilities for regime switching

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:선물연구 2021-06, Vol.29 (2), p.102
Hauptverfasser: Hyo-chan Lee, Seyoung Park, Jong Mun Yoon
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Cash flows
Optimal investment
Option
Regime switching
Time-varying transition probabilities
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container_title 선물연구
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creator Hyo-chan Lee
Seyoung Park
Jong Mun Yoon
description 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.
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subjects Cash flows
Optimal investment
Option
Regime switching
Time-varying transition probabilities
title Optimal investment with time-varying transition probabilities for regime switching
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