Details

Autor(en) / Beteiligte

• Lee, Hyo-Chan
• Park, Seyoung
• Yoon, Jong Mun

Titel

Optimal investment with time-varying transition probabilities for regime switching

Ist Teil von

• Journal of Derivatives and Quantitative Studies: 선물연구, 2021-06, Vol.29 (2), p.102-115

Ort / Verlag

Bingley: Emerald Group Publishing Limited

Erscheinungsjahr

2021

Quelle

EZB Electronic Journals Library

Beschreibungen/Notizen

• 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.