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Stochastic Control of Corporate Investment when Output Affects Future Prices

Published online by Cambridge University Press:  06 April 2009

Terence C. Langetieg
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Abstract

The advance of the theory of contingent claim pricing has made it possible to model and analyze very complex financial claims. When the value of the firm can be represented as a contingent claim, then the firm's optimal financial policy can be determined with only a slight modification in standard solution techniques for contingent claims. In this paper, stochastic control theory is used to determine a dynamic investment policy for the valuemaximizing firm. The value of future, stochastic economic rents (i.e., the net present value of the firm), and the firm's optimal investment policy must reflect a rational reaction on behalf of its competitors. A computationally efficient methodology is presented for solving the simultaneous investment-valuation problem for an n-firm game.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 21 , Issue 3 , September 1986 , pp. 239 - 263
Copyright
Copyright © School of Business Administration, University of Washington 1986

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