English

Analytical solution to an investment problem under uncertainties with shocks

Optimization and Control 2015-09-16 v2 Portfolio Management

Abstract

We derive the optimal investment decision in a project where both demand and investment costs are stochastic processes, eventually subject to shocks. We extend the approach used in Dixit and Pindyck (1994), chapter 6.5, to deal with two sources of uncertainty, but assuming that the underlying processes are no longer geometric Brownian diffusions but rather jump diffusion processes. For the class of isoelastic functions that we address in this paper, it is still possible to derive a closed expression for the value of the firm. We prove formally that the result we get is indeed the solution of the optimization problem.

Keywords

Cite

@article{arxiv.1509.04135,
  title  = {Analytical solution to an investment problem under uncertainties with shocks},
  author = {Cláudia Nunes and Rita Pimentel},
  journal= {arXiv preprint arXiv:1509.04135},
  year   = {2015}
}
R2 v1 2026-06-22T10:56:08.566Z