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Hysteresis Effects under CIR Interest Rates

Research output: Working paper

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Hysteresis Effects under CIR Interest Rates. / Dias, J C; Shackleton, M B.

Lancaster University : The Department of Accounting and Finance, 2010. (Accounting and Finance Working Paper Series).

Research output: Working paper

Harvard

Dias, JC & Shackleton, MB 2010 'Hysteresis Effects under CIR Interest Rates' Accounting and Finance Working Paper Series, The Department of Accounting and Finance, Lancaster University.

APA

Dias, J. C., & Shackleton, M. B. (2010). Hysteresis Effects under CIR Interest Rates. (Accounting and Finance Working Paper Series). The Department of Accounting and Finance.

Vancouver

Dias JC, Shackleton MB. Hysteresis Effects under CIR Interest Rates. Lancaster University: The Department of Accounting and Finance. 2010. (Accounting and Finance Working Paper Series).

Author

Dias, J C ; Shackleton, M B. / Hysteresis Effects under CIR Interest Rates. Lancaster University : The Department of Accounting and Finance, 2010. (Accounting and Finance Working Paper Series).

Bibtex

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title = "Hysteresis Effects under CIR Interest Rates",
abstract = "Most decision making research in real options focuses on revenue uncertainty assuming dis- count 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 de- cision to invest in durable machinery and equipment. Using interest rate models from Cox et al. (1985b), we generalize the work of Ingersoll and Ross (1992) 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 Dixit (1989a)). Under stochastic interest rates, economic hysteresis is found to be significant, even for small sunk costs.",
keywords = "Finance, Real options, Interest rate uncertainty, Perpetuities, Investment hyste-resis",
author = "Dias, {J C} and Shackleton, {M B}",
year = "2010",
language = "English",
series = "Accounting and Finance Working Paper Series",
publisher = "The Department of Accounting and Finance",
type = "WorkingPaper",
institution = "The Department of Accounting and Finance",

}

RIS

TY - UNPB

T1 - Hysteresis Effects under CIR Interest Rates

AU - Dias, J C

AU - Shackleton, M B

PY - 2010

Y1 - 2010

N2 - Most decision making research in real options focuses on revenue uncertainty assuming dis- count 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 de- cision to invest in durable machinery and equipment. Using interest rate models from Cox et al. (1985b), we generalize the work of Ingersoll and Ross (1992) 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 Dixit (1989a)). Under stochastic interest rates, economic hysteresis is found to be significant, even for small sunk costs.

AB - Most decision making research in real options focuses on revenue uncertainty assuming dis- count 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 de- cision to invest in durable machinery and equipment. Using interest rate models from Cox et al. (1985b), we generalize the work of Ingersoll and Ross (1992) 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 Dixit (1989a)). Under stochastic interest rates, economic hysteresis is found to be significant, even for small sunk costs.

KW - Finance

KW - Real options

KW - Interest rate uncertainty

KW - Perpetuities

KW - Investment hyste-resis

M3 - Working paper

T3 - Accounting and Finance Working Paper Series

BT - Hysteresis Effects under CIR Interest Rates

PB - The Department of Accounting and Finance

CY - Lancaster University

ER -