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Stochastic discount factors and the optimal timing of irreversible investments

Author

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  • Armerin, Fredrik

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

Abstract

By using a general semimartingale framework, we show how the transformation of an optimal stopping problem under the objective probability measure into an optimal stopping problem under the risk-neutral probability measure looks like. We also note that the difference between equivalent and a locally equivalent are important when considering infinite time horizons (i.e., when considering perpetual options).

Suggested Citation

  • Armerin, Fredrik, 2019. "Stochastic discount factors and the optimal timing of irreversible investments," Working Paper Series 19/11, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    • Handle: RePEc:hhs:kthrec:2019_011
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    References listed on IDEAS

    as
    1. Jacco Thijssen, 2010. "Irreversible investment and discounting: an arbitrage pricing approach," Annals of Finance, Springer, vol. 6(3), pages 295-315, July.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Likuan Qin & Vadim Linetsky, 2017. "Long‐Term Risk: A Martingale Approach," Econometrica, Econometric Society, vol. 85, pages 299-312, January.
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    More about this item

    Keywords

    optimal stopping; stochastic discount factors; irreversible investments;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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