Entry and Exit Decision Problem with Implementation Delay

26 Pages Posted: 30 Jun 2008 Last revised: 18 May 2009

See all articles by Marius Costeniuc

Marius Costeniuc

Swiss Re

Michaela Schnetzer

affiliation not provided to SSRN

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

Date Written: June 1, 2008

Abstract

We study investment and disinvestment decisions in situations where there is a time lag 0 from the time t when the decision is taken to the time when the decision is implemented. Applying the probabilistic approach to the combined entry and exit decisions under the Parisian implementation delay, we solve the constrained maximization problem, obtaining an analytic solution to the optimal "starting" and "stopping" levels. We compare our results with the instantaneous entry and exit situation, and show that an increase in the uncertainty of the underlying process hastens the decision to invest or disinvest, extending a result of Bar-Ilan and Strange (1996).

Keywords: Brownian excursion, Implementation Delay, Parisian Option, Optimal Stopping, Wald's Identity

JEL Classification: C60, C61, C65, G13

Suggested Citation

Costeniuc, Marius and Schnetzer, Michaela and Taschini, Luca, Entry and Exit Decision Problem with Implementation Delay (June 1, 2008). Journal of Applied Probability, Vol. 45, No. 4, 2008. Available at SSRN: https://ssrn.com/abstract=1153380 or http://dx.doi.org/10.2139/ssrn.1153380

Marius Costeniuc

Swiss Re ( email )

55 East 52nd Street
New York, NY 10055
United States

Michaela Schnetzer

affiliation not provided to SSRN

Luca Taschini (Contact Author)

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

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