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Investment timing under incomplete information

Décamps, Jean-Paul and Mariotti, Thomas and Villeneuve, Stephane (2003) Investment timing under incomplete information. TE, 444. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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Identification Number: 444

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)
Official URL: http://sticerd.lse.ac.uk
Additional Information: © 2003 the authors
Subjects: H Social Sciences > HB Economic Theory
Sets: Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 11 Jul 2008 14:18
Last Modified: 01 Oct 2010 09:11
URI: http://eprints.lse.ac.uk/id/eprint/19325

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