Bibliographic Details
| 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] |
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| Database: |
Engineering Source |
