Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81115
Authors: 
De Angelis, Tiziano
Ferrari, Giorgio
Year of Publication: 
2013
Series/Report no.: 
Working Papers, Center of Mathematical Economics 477
Abstract: 
We study a continuous-time, finite horizon optimal stochastic reversible investment problem for a firm producing a single good. The production capacity is modeled as a onedimensional,time-homogeneous, linear diffusion controlled by a bounded variation process which represents the cumulative investment-disinvestment strategy. We associate to the investmentdisinvestment problem a zero-sum optimal stopping game and characterize its value function through a free boundary problem with two moving boundaries. These are continuous, bounded and monotone curves that solve a system of non-linear integral equations of Volterra type. The optimal investment-disinvestment strategy is then shown to be a diff usion reflected at the two boundaries.
Subjects: 
reversible investment
singular stochastic control
zero-sum optimal stopping games
free boundary problems
Skorokhod reflection problem
JEL: 
C02
C73
E22
D92
Document Type: 
Working Paper

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