Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/258638 
Year of Publication: 
2021
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 14 [Issue:] 11 [Article No.:] 535 [Publisher:] MDPI [Place:] Basel [Year:] 2021 [Pages:] 1-13
Publisher: 
MDPI, Basel
Abstract: 
Often, firms can choose from different combinations of price and cost processes. For example, they can choose between different production locations or technologies, between different products to produce, or between different locations for selling them. To study the choice of the optimal combination, we return to themodel that was developed by Dixit and Pindyck, where both output price and production cost are stochastic processes, and add a novel focus on how the correlation between these processes affects the firm's decision. We find that, ceteris paribus, the firm prefers the combination with the lowest correlation between the processes, as it seeks a greater profitability variance which maximizes its value.
Subjects: 
investment
real-options
correlation
JEL: 
C61
D40
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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