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arXiv · 2103.08258

On an Irreversible Investment Problem with Two-Factor Uncertainty

Felix Dammann·Giorgio Ferrari
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Abstract

We consider a real options model for the optimal irreversible investment problem of a profit maximizing company. The company has the opportunity to invest into a production plant capable of producing two products, of which the prices follow two independent geometric Brownian motions. After paying a constant sunk investment cost, the company sells the products on the market and thus receives a continuous stochastic revenue-flow. This investment problem is set as a two-dimensional optimal stopping problem. We find that the optimal investment decision is triggered by a convex curve, which we characterize as the unique continuous solution to a nonlinear integral equation. Furthermore, we provide analytical and numerical comparative statics results of the dependency of the project's value and investment decision with respect to the model's parameters.

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Felix Dammann, Giorgio Ferrari. 2021-03-15. On an Irreversible Investment Problem with Two-Factor Uncertainty. https://arxiv.org/abs/2103.08258

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