Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/337227 
Year of Publication: 
2021
Citation: 
[Journal:] Journal of Derivatives and Quantitative Studies: Seonmul yeon'gu (JDQS) [ISSN:] 2713-6647 [Volume:] 29 [Issue:] 2 [Year:] 2021 [Pages:] 102-115
Publisher: 
Emerald, Leeds
Abstract: 
This study aims to generalize the following result of McDonald and Siegel (1986) on optimal investment: it is optimal for an investor to invest when project cash flows exceed a certain threshold. This study presents other results that refine or extend this one by integrating timing flexibility and changes in cash flows with time-varying transition probabilities for regime switching. This study emphasizes that optimal thresholds are either overvalued or undervalued in the absence of time-varying transition probabilities. Accordingly, the stochastic nature of transition probabilities has important implications to the search for optimal timing of investment.
Subjects: 
Optimal investment
Time-varying transition probabilities
Regime switching
Cash flows
Option
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article

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