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Hysteresis effects under CIR interest rates

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Hysteresis effects under CIR interest rates. / Dias, José Carlos; Shackleton, Mark B.
In: European Journal of Operational Research, Vol. 211, No. 3, 16.06.2011, p. 594-600.

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

Harvard

Dias, JC & Shackleton, MB 2011, 'Hysteresis effects under CIR interest rates', European Journal of Operational Research, vol. 211, no. 3, pp. 594-600. https://doi.org/10.1016/j.ejor.2010.12.021

APA

Dias, J. C., & Shackleton, M. B. (2011). Hysteresis effects under CIR interest rates. European Journal of Operational Research, 211(3), 594-600. https://doi.org/10.1016/j.ejor.2010.12.021

Vancouver

Dias JC, Shackleton MB. Hysteresis effects under CIR interest rates. European Journal of Operational Research. 2011 Jun 16;211(3):594-600. doi: 10.1016/j.ejor.2010.12.021

Author

Dias, José Carlos ; Shackleton, Mark B. / Hysteresis effects under CIR interest rates. In: European Journal of Operational Research. 2011 ; Vol. 211, No. 3. pp. 594-600.

Bibtex

@article{9cedc7425e664b78991e5578230b3291,
title = "Hysteresis effects under CIR interest rates",
abstract = "Most decision making research in real options focuses on revenue uncertainty assuming discount 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 decision 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, Interest rate uncertainty, Investment hysteresis, Perpetuities, Real options",
author = "Dias, {Jos{\'e} Carlos} and Shackleton, {Mark B.}",
year = "2011",
month = jun,
day = "16",
doi = "10.1016/j.ejor.2010.12.021",
language = "English",
volume = "211",
pages = "594--600",
journal = "European Journal of Operational Research",
issn = "0377-2217",
publisher = "Elsevier Science B.V.",
number = "3",

}

RIS

TY - JOUR

T1 - Hysteresis effects under CIR interest rates

AU - Dias, José Carlos

AU - Shackleton, Mark B.

PY - 2011/6/16

Y1 - 2011/6/16

N2 - Most decision making research in real options focuses on revenue uncertainty assuming discount 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 decision 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 discount 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 decision 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 - Interest rate uncertainty

KW - Investment hysteresis

KW - Perpetuities

KW - Real options

U2 - 10.1016/j.ejor.2010.12.021

DO - 10.1016/j.ejor.2010.12.021

M3 - Journal article

AN - SCOPUS:79952193450

VL - 211

SP - 594

EP - 600

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

IS - 3

ER -