Booms, recessions and financial turmoil: a fresh look at investment decisions under cyclical uncertainty

Yu-Fu Chen, Michael Funke

    Research output: Contribution to journalArticle

    2 Citations (Scopus)

    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.
    Original languageEnglish
    Pages (from-to)290-317
    JournalScottish Journal of Political Economy
    Volume57
    Issue number3
    Early online date4 May 2010
    DOIs
    Publication statusPublished - Jul 2010

    Keywords

    • Business cycles
    • Real options
    • Investment
    • Markov switching
    • Tobin’s q
    • Uncertainty

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    • 2 Citations
    • 1 Discussion paper

    Booms, recessions and financial turmoil: a fresh look at investment decisions under cyclical uncertainty

    Chen, Y-F. & Funke, M., 2009, University of Dundee, (Dundee Discussion Papers in Economics; no. 225).

    Research output: Working paperDiscussion paper

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