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Investment Option Under Cir Interest Rates

Author

Listed:
  • Ángel León

    (Universidad de Alicante)

  • Julio Carmona

    (Universidad de Alicante)

Abstract

We analyze extensively the characteristics of the solution to an irreversibleinvestment decision when the only source of uncertainty comes from interest rates.They are assumed to be driven by the popular Cox-Ingersoll-Ross (CIR) stochasticprocess. Particular attention is paid to the impact that both CIR parameters and riskaversion have on the threshold rate.

Suggested Citation

  • Ángel León & Julio Carmona, 2007. "Investment Option Under Cir Interest Rates," Working Papers. Serie AD 2007-24, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2007-24
    as

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2007-24.pdf
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    References listed on IDEAS

    as
    1. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
    2. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    3. Alvarez, Luis H.R. & Koskela, Erkki, 2006. "Does risk aversion accelerate optimal forest rotation under uncertainty?," Journal of Forest Economics, Elsevier, vol. 12(3), pages 171-184, December.
    4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    6. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    7. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    8. Luis H. R. Alvarez & Erkki Koskela, 2006. "Irreversible Investment under Interest Rate Variability: Some Generalizations," The Journal of Business, University of Chicago Press, vol. 79(2), pages 623-644, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Dotsis, George, 2020. "Investment under uncertainty with a zero lower bound on interest rates," Economics Letters, Elsevier, vol. 188(C).
    2. Tim Leung & Xin Li & Zheng Wang, 2014. "Optimal Starting-Stopping and Switching of a CIR Process with Fixed Costs," Papers 1411.6080, arXiv.org.
    3. Ewald, Christian-Oliver & Wang, Wen-Kai, 2010. "Irreversible investment with Cox-Ingersoll-Ross type mean reversion," Mathematical Social Sciences, Elsevier, vol. 59(3), pages 314-318, May.
    4. Matthew Lorig & Natchanon Suaysom, 2022. "Optimal times to buy and sell a home," Papers 2203.05545, arXiv.org, revised Mar 2022.
    5. Loretta Mastroeni & Alessandro Mazzoccoli & Maurizio Naldi, 2022. "Pricing Cat Bonds for Cloud Service Failures," JRFM, MDPI, vol. 15(10), pages 1-18, October.
    6. Nowak, Piotr & Romaniuk, Maciej, 2013. "Pricing and simulations of catastrophe bonds," Insurance: Mathematics and Economics, Elsevier, vol. 52(1), pages 18-28.

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    More about this item

    Keywords

    CIR process; Project value; Real options; Risk aversion.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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