Discovery - University of Dundee - Online Publications

Library & Learning Centre

Booms, recessions and financial turmoil

Booms, recessions and financial turmoil: A fresh look at investment decisions under cyclical uncertanity

Research output: Contribution to journalArticle

View graph of relations

Authors

Research units

Info

Original languageEnglish
Pages290-317
Number of pages28
JournalScottish Journal of Political Economy
Journal publication dateJul 2010
Volume57
Issue3
StatePublished

Abstract

The paper studies the interaction between cyclical uncertainty and investment in a stochastic real option framework where demand shifts stochastically between three different states, each with different rates of drift and volatility. In our setting, the shifts are governed by a three-state Markov switching model with constant transition probabilities. The magnitude of the link between cyclical uncertainty and investment is quantified using simulations of the model. The chief implication of the model is that recessions and financial turmoil are important catalysts for waiting. In other words, our model shows that macroeconomic risk acts as an important deterrent to investments.

Documents

Library & Learning Centre

Contact | Accessibility | Policy