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Optimal R &D Investment Problem with Regime-Switching

Author

Listed:
  • Ming-hui Wang

    (Southwestern University of Finance and Economics)

  • Jia Yue

    (Southwestern University of Finance and Economics)

  • Nan-jing Huang

    (Sichuan University)

Abstract

In this paper, we study the optimal research and development (R &D) investment problem under the framework of real options in a regime-switching environment. We assume that the firm has an R &D project whose input process with technical uncertainty is affected by different regimes. By the method of dynamic programming, we have obtained the related Hamilton–Jacobi–Bellman (HJB) equation and solved it in three different cases. Then, the optimal solution for our model is constructed and the related verification theorem is also provided. Finally, some numerical examples are given to investigate the properties of our model.

Suggested Citation

  • Ming-hui Wang & Jia Yue & Nan-jing Huang, 2024. "Optimal R &D Investment Problem with Regime-Switching," Journal of Optimization Theory and Applications, Springer, vol. 202(2), pages 878-896, August.
    • Handle: RePEc:spr:joptap:v:202:y:2024:i:2:d:10.1007_s10957-024-02451-0
    DOI: 10.1007/s10957-024-02451-0
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    References listed on IDEAS

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    4. Chronopoulos, Michail & Lumbreras, Sara, 2017. "Optimal regime switching under risk aversion and uncertainty," European Journal of Operational Research, Elsevier, vol. 256(2), pages 543-555.
    5. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2021. "Strategic technology switching under risk aversion and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 126(C).
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