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Costly switching and investment volatility

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  • Tackseung Jun

Abstract

This paper extends the literature on the optimal switching rule between two investments by considering the case where switching between investments is costly. The model builds on the classic framework of the multi-armed Bandit problem by explicitly incorporating two key assumptions. First, switching investments is costly. Second, only the investment operated by the investor evolves as a random walk. The objective of the investor is to maximize the discounted sum of expected net profits over the infinite horizon. The main result is that when the volatility of profits from investments increases, so does the minimum profit gain needed for an investor to switch investments. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Tackseung Jun, 2005. "Costly switching and investment volatility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(2), pages 317-332, February.
    • Handle: RePEc:spr:joecth:v:25:y:2005:i:2:p:317-332
    DOI: 10.1007/s00199-003-0439-3
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    Cited by:

    1. Jaratin Lily & Imbarine Bujang & Abdul Aziz Karia & Mori Kogid, 2018. "Exchange rate exposure revisited in Malaysia: a tale of two measures," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 8(4), pages 409-435, December.

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