Optimal Investment Timing under A Mean-reverting Process: A Real Options Approach

• Fukui Yuta

  Graduate School of Science and Technology, Keio University

• Imai Junichi

  Faculty of Science and Technology, Keio University

Bibliographic Information

Other Title

• リアルオプションアプローチによる平均回帰過程の下での投資タイミングの分析

Abstract

This paper investigates the optimal entry and exit decisions under a mean-reverting process over a finite horizon. Many theoretical studies on real options assume that an underlying risk follows a geometric Brownian motion over an infinite-time horizon. This assumption is not always practical, especially in discussing realistic investment strategies. In this paper, we examine effects of the mean-reverting process on both entry and exit decisions over a finite horizon. We focus on deriving the optimal boundaries of entry and exit decisions under a mean-reverting process, and compare the effects of the underlying risk process and length of the project horizon on the optimal decisions. Numerical examples in this paper demonstrate that the length of horizon could have a significant impact on the boundaries of the optimal decisions, and hence on project values, particularly under a mean-reverting process.

Journal

• Journal of Real Options and Strategy

  Journal of Real Options and Strategy 7 (2), 37-57, 2015

  The Japan Association of Real Options and Strategy

Keywords

• Real options
• Mean-reverting processes
• Investment timing
• Finite horizon

Details

• CRID: 1390282680293962240
• NII Article ID: 130005117645
• DOI: 10.12949/realopn.7.37
• ISSN: 18841635
• ISSN: 18815774
• Web Site: https://www.jstage.jst.go.jp/article/realopn/7/2/7_37/_pdf
• Text Lang: ja
• Data Source:
  • JaLC
  • Crossref
  • CiNii Articles
  • KAKEN
• Abstract License Flag: Disallowed