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The effect of mean reversion on entry and exit decisions under uncertainty

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The effect of mean reversion on entry and exit decisions under uncertainty. / Tsekrekos, Andrianos.
In: Journal of Economic Dynamics and Control, Vol. 34, No. 4, 04.2010, p. 725-742.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Tsekrekos, A 2010, 'The effect of mean reversion on entry and exit decisions under uncertainty', Journal of Economic Dynamics and Control, vol. 34, no. 4, pp. 725-742. https://doi.org/10.1016/j.jedc.2009.10.015

APA

Tsekrekos, A. (2010). The effect of mean reversion on entry and exit decisions under uncertainty. Journal of Economic Dynamics and Control, 34(4), 725-742. https://doi.org/10.1016/j.jedc.2009.10.015

Vancouver

Tsekrekos A. The effect of mean reversion on entry and exit decisions under uncertainty. Journal of Economic Dynamics and Control. 2010 Apr;34(4):725-742. doi: 10.1016/j.jedc.2009.10.015

Author

Tsekrekos, Andrianos. / The effect of mean reversion on entry and exit decisions under uncertainty. In: Journal of Economic Dynamics and Control. 2010 ; Vol. 34, No. 4. pp. 725-742.

Bibtex

@article{e5aa2912e14b45fcb6e191e784d22a75,
title = "The effect of mean reversion on entry and exit decisions under uncertainty",
abstract = "Many economic variables of interest exhibit a tendency to revert to predictable long-run levels. However, mean reverting processes are rarely used in investment models in the literature. In most models, geometric Brownian motion processes are used for tractability. In this paper, a firm's entry and exit decisions when the output equilibrium price follows an exogenous mean reverting process are examined, and then compared to the decisions of the firm under the usually employed assumption of lognormally distributed output price, presented in Dixit (1989a). By extending previous work by Sarkar (2003) to account for costly reversibility, we show that mean reversion has a significant effect, not only on firm-specific entry and exit decisions, but also on the balance of entering and exiting firms in an industry/market. Thus it would be erroneous to use the more tractable geometric Brownian motion process as an approximation for a mean-reverting process in models and investigations of aggregate industry investment.",
keywords = "investment, uncertainty, real options, mean reversion",
author = "Andrianos Tsekrekos",
year = "2010",
month = apr,
doi = "10.1016/j.jedc.2009.10.015",
language = "English",
volume = "34",
pages = "725--742",
journal = "Journal of Economic Dynamics and Control",
issn = "0165-1889",
publisher = "Elsevier",
number = "4",

}

RIS

TY - JOUR

T1 - The effect of mean reversion on entry and exit decisions under uncertainty

AU - Tsekrekos, Andrianos

PY - 2010/4

Y1 - 2010/4

N2 - Many economic variables of interest exhibit a tendency to revert to predictable long-run levels. However, mean reverting processes are rarely used in investment models in the literature. In most models, geometric Brownian motion processes are used for tractability. In this paper, a firm's entry and exit decisions when the output equilibrium price follows an exogenous mean reverting process are examined, and then compared to the decisions of the firm under the usually employed assumption of lognormally distributed output price, presented in Dixit (1989a). By extending previous work by Sarkar (2003) to account for costly reversibility, we show that mean reversion has a significant effect, not only on firm-specific entry and exit decisions, but also on the balance of entering and exiting firms in an industry/market. Thus it would be erroneous to use the more tractable geometric Brownian motion process as an approximation for a mean-reverting process in models and investigations of aggregate industry investment.

AB - Many economic variables of interest exhibit a tendency to revert to predictable long-run levels. However, mean reverting processes are rarely used in investment models in the literature. In most models, geometric Brownian motion processes are used for tractability. In this paper, a firm's entry and exit decisions when the output equilibrium price follows an exogenous mean reverting process are examined, and then compared to the decisions of the firm under the usually employed assumption of lognormally distributed output price, presented in Dixit (1989a). By extending previous work by Sarkar (2003) to account for costly reversibility, we show that mean reversion has a significant effect, not only on firm-specific entry and exit decisions, but also on the balance of entering and exiting firms in an industry/market. Thus it would be erroneous to use the more tractable geometric Brownian motion process as an approximation for a mean-reverting process in models and investigations of aggregate industry investment.

KW - investment

KW - uncertainty

KW - real options

KW - mean reversion

U2 - 10.1016/j.jedc.2009.10.015

DO - 10.1016/j.jedc.2009.10.015

M3 - Journal article

VL - 34

SP - 725

EP - 742

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

IS - 4

ER -