Library Header Image
LSE Research Online LSE Library Services

A model for the long-term optimal capacity level of an investment project

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

Full text not available from this repository.

Identification Number: 10.1142/S0219024911006322


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:
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: 16 May 2024 01:19

Actions (login required)

View Item View Item