Irreversible Investment with Cox-Ingersoll-Ross Type Mean Reversion

30 Pages Posted: 3 Oct 2007

See all articles by Christian-Oliver Ewald

Christian-Oliver Ewald

University of Glasgow; Høgskole i Innlandet

Wen-Kai Wang

National University of Kaohsiung - Department of Finance

Date Written: October 1, 2007

Abstract

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

Suggested Citation

Ewald, Christian-Oliver and Wang, Wen-Kai, Irreversible Investment with Cox-Ingersoll-Ross Type Mean Reversion (October 1, 2007). Available at SSRN: https://ssrn.com/abstract=1018393 or http://dx.doi.org/10.2139/ssrn.1018393

Christian-Oliver Ewald (Contact Author)

University of Glasgow ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Høgskole i Innlandet ( email )

Lillehammer, 2624
Norway

Wen-Kai Wang

National University of Kaohsiung - Department of Finance ( email )

700 Kaohsiung University Rd.
Nanzih District
Kaohsiung 803
Taiwan

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