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Hysteresis effects under CIR interest rates

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Title: Hysteresis effects under CIR interest rates
Authors: Dias, José Carlos1 jdias@iscac.pt, Shackleton, Mark B.2 m.shackleton@lancaster.ac.uk
Source: European Journal of Operational Research. Jun2011, Vol. 211 Issue 3, p594-600. 7p.
Subjects: Hysteresis (Economics), Perpetuities, Interest rates, Discount prices, Cash flow, Real options (Finance), Uncertainty, Stochastic analysis
Abstract: Abstract: Most decision making research in real options focuses on revenue uncertainty assuming discount rates remain constant. However, for many decisions 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 , we generalize the work of 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 in ). Under stochastic interest rates, economic hysteresis is found to be significant, even for small sunk costs. [Copyright &y& Elsevier]
Copyright of European Journal of Operational Research is the property of Elsevier B.V. and its content may not be copied or emailed to multiple sites without the copyright holder's express written permission. Additionally, content may not be used with any artificial intelligence tools or machine learning technologies. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)
Database: Engineering Source
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PubType: Academic Journal
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  Data: <searchLink fieldCode="AR" term="%22Dias%2C+José+Carlos%22">Dias, José Carlos</searchLink><relatesTo>1</relatesTo><i> jdias@iscac.pt</i><br /><searchLink fieldCode="AR" term="%22Shackleton%2C+Mark+B%2E%22">Shackleton, Mark B.</searchLink><relatesTo>2</relatesTo><i> m.shackleton@lancaster.ac.uk</i>
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  Data: <searchLink fieldCode="JN" term="%22European+Journal+of+Operational+Research%22">European Journal of Operational Research</searchLink>. Jun2011, Vol. 211 Issue 3, p594-600. 7p.
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  Data: <searchLink fieldCode="DE" term="%22Hysteresis+%28Economics%29%22">Hysteresis (Economics)</searchLink><br /><searchLink fieldCode="DE" term="%22Perpetuities%22">Perpetuities</searchLink><br /><searchLink fieldCode="DE" term="%22Interest+rates%22">Interest rates</searchLink><br /><searchLink fieldCode="DE" term="%22Discount+prices%22">Discount prices</searchLink><br /><searchLink fieldCode="DE" term="%22Cash+flow%22">Cash flow</searchLink><br /><searchLink fieldCode="DE" term="%22Real+options+%28Finance%29%22">Real options (Finance)</searchLink><br /><searchLink fieldCode="DE" term="%22Uncertainty%22">Uncertainty</searchLink><br /><searchLink fieldCode="DE" term="%22Stochastic+analysis%22">Stochastic analysis</searchLink>
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  Data: Abstract: Most decision making research in real options focuses on revenue uncertainty assuming discount rates remain constant. However, for many decisions 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 , we generalize the work of 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 in ). Under stochastic interest rates, economic hysteresis is found to be significant, even for small sunk costs. [Copyright &y& Elsevier]
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  Data: <i>Copyright of European Journal of Operational Research is the property of Elsevier B.V. and its content may not be copied or emailed to multiple sites without the copyright holder's express written permission. Additionally, content may not be used with any artificial intelligence tools or machine learning technologies. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract.</i> (Copyright applies to all Abstracts.)
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        Value: 10.1016/j.ejor.2010.12.021
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      – Code: eng
        Text: English
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        PageCount: 7
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      – SubjectFull: Hysteresis (Economics)
        Type: general
      – SubjectFull: Perpetuities
        Type: general
      – SubjectFull: Interest rates
        Type: general
      – SubjectFull: Discount prices
        Type: general
      – SubjectFull: Cash flow
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      – SubjectFull: Real options (Finance)
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      – SubjectFull: Uncertainty
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      – SubjectFull: Stochastic analysis
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      – TitleFull: Hysteresis effects under CIR interest rates
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              Text: Jun2011
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              Y: 2011
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