Investment hysteresis under stochastic interest rates

Dias, J C and Shackleton, M B (2005) Investment hysteresis under stochastic interest rates. Working Paper. The Department of Accounting and Finance, Lancaster University.

[thumbnail of Document.pdf]
PDF (Document.pdf)

Download (284kB)


Most decision making research in real options focuses on revenue uncertainty assuming discount rates remain constant. For many decisions, however, revenue or cost streams are relatively static and investment is driven by interest rate uncertainty, for example the decision to invest in durable machinery and equipment. Using interest rate models from Cox et al. (1985b), we generalize the work of Ingersoll and Ross (1992) in two ways. Firstly, we include real options on perpetuities (in addition to "zero coupon" cash flows). Secondly, we incorporate abandonment or disinvestment as well as investment options and thus model interest rate hysteresis [parallel to revenue uncertainty, Dixit (1989a)]. Under stochastic interest rates, economic hysteresis is found to be significant, even for small sunk costs.

Item Type:
Monograph (Working Paper)
Uncontrolled Keywords:
?? real optionsinterest rate uncertaintyperpetuitiesinvestment hysteresisdiscipline-based research ??
ID Code:
Deposited By:
Deposited On:
11 Jul 2011 21:13
Last Modified:
15 Jul 2024 07:52