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Economic hysteresis effects and hitting time densities for CIR diffusions

Dias, J C and Shackleton, M B (2008) Economic hysteresis effects and hitting time densities for CIR diffusions. Working Paper. The Department of Accounting and Finance, Lancaster University.

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    Abstract

    Using the so-called mean-reverting square-root process of Cox et al. (1985b) we generalize the work of Dias and Shackleton (2005) by introducing the mean reversion feature into the economic hysteresis analysis under stochastic interest rates and show that such issue highlights a tendency for a widening effect on the range of inaction, though both thresholds have risen when compared with the no mean-reverting case. In addition, using the work of Linetsky (2004) we compute the hitting time densities in order to have an idea of how long does it take for a current interest rate to revert and hit the investment thresholds that would induce idle firms to invest.

    Item Type: Monograph (Working Paper)
    Uncontrolled Keywords: Real options ; interest rate uncertainty ; perpetuities ; investment hysteresis ; mean reversion ; hitting time densities
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 48922
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:21
    Refereed?: No
    Published?: Published
    Last Modified: 27 Jul 2012 01:18
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/48922

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