Décamps, Jean-Paul, Mariotti, Thomas and Villeneuve, Stephane (2003) Investment timing under incomplete information. TE (444). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.
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Abstract
We study the decision of when to invest in an indivisible project whose value is perfectly observable but driven by a parameter that is unknown to the decision maker ex ante. This problem is equivalent to an optimal stopping problem for a bivariate Markov process. Using filtering and martingale techniques, we show that the optimal investment region is characterised by a continuous and non-decreasing boundary in the value/belief state space. This generates path-dependency in the optimal investment strategy. We further show that the decision maker always benefits from an uncertain drift relative to an 'average' drift situation. However, a local study of the investment boundary reveals that the value of the option to invest is not globally increasing with respect to the volatility of the value process.
| Item Type: | Monograph (Discussion Paper) |
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| Official URL: | http://sticerd.lse.ac.uk |
| Additional Information: | © 2003 the authors |
| Divisions: | STICERD |
| Subjects: | H Social Sciences > HB Economic Theory |
| JEL classification: | D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C61 - Optimization Techniques; Programming Models; Dynamic Analysis |
| Date Deposited: | 11 Jul 2008 14:18 |
| Last Modified: | 11 Dec 2024 18:34 |
| URI: | http://eprints.lse.ac.uk/id/eprint/19325 |
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