Chapter

Models of Investment

GREGORY C. CHOW

in Dynamic Economics

Published in print April 1997 | ISBN: 9780195101928
Published online October 2011 | e-ISBN: 9780199855032 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780195101928.003.0008
Models of Investment

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In models that represent the investment decision made by a firm, the decision is to be perceived as an option to invest. As such, the option cannot be reversed once it has been employed. By the stochastic differential equation illustrated in this chapter, which also includes a variable to denote the Wiener process, the present value of the investment project at a certain time is said to change through time. In such problems, it is important to determine the optimum time to invest or to push through with the desired option. This chapter looks into the theory of investment, specifically through how Pindyck has solved the problem through dynamic programming and Lagrangean multipliers. It also looks at models which incorporate adjustment cost.

Keywords: investment decision; differential equation; dynamic programming; adjustment cost; optimum time

Chapter.  4636 words. 

Subjects: Financial Markets

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