Lokka, A. 
ORCID: 0000-0003-0263-267X and Zervos, Mihail ORCID: 0000-0001-5194-6881
(2011)
A model for the long-term optimal capacity level of an investment project.
International Journal of Theoretical and Applied Finance, 14 (02).
p. 187.
ISSN 0219-0249
Abstract
We consider an investment project that produces a single commodity. The project’s operation yields payoff at a rate that depends on the project’s installed capacity level and on an underlying economic indicator such as the output commodity’s price or demand, which we model by an ergodic, one-dimensional Itˆo diffusion. The project’s capacity level can be increased dynamically over time. The objective is to determine a capacity expansion strategy that maximizes the ergodic or long-term average payoff resulting from the project’s management. We prove that it is optimal to increase the project’s capacity level to a certain value and then take no further actions. The optimal capacity level depends on both the long-term average and the volatility of the underlying diffusion.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.worldscinet.com/ijtaf/ |
| Additional Information: | © 2011 World Scientific Publishing Co. Pte. Ltd. |
| Divisions: | Mathematics |
| Subjects: | Q Science > QA Mathematics |
| Date Deposited: | 23 Jan 2012 15:23 |
| Last Modified: | 01 Nov 2024 04:21 |
| URI: | http://eprints.lse.ac.uk/id/eprint/41650 |
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