Irreversible Investment with Cox-Ingersoll-Ross Type Mean Reversion
30 Pages Posted: 3 Oct 2007
Date Written: October 1, 2007
We solve a Dixit and Pindyck type irreversible investment problem in continuous time under the assumption that the project value follows a Cox-Ingersoll-Ross process. We indicate how the solution qualitatively differs from the two classical cases geometric Brownian motion and geometric mean reversion. Furthermore we discuss analytical properties of the Cox-Ingersoll-Ross process and demonstrate potential advantageous of this process as a model of the project value with regards to the classical ones.
Keywords: Irreversible investment, real options, models of mean-reversion
JEL Classification: C61, G11, G12, G31
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