Evaluating Uncertain Income Streams under a Regime-Switching Process

DOI

10.2991/jcis.2006.92How to use a DOI?

Keywords

dynamic programming, regime-switching process, incomplete markets

Abstract

This paper extends the dynamic programming, utility maximization model proposed by Wang (2004) to value an investment opportunity whose income streams follows a regime-switching process in incomplete markets. Specifically, the model is applied to solve for certainty equivalent of an investment opportunity in a two-regime, five-branch lattice. The application is then expanded to a more general case of multi-nodes and multi-regimes. The finding indicates that investor’s risk attitude is a non-trivial factor in investment decision-making. When the investor is more risk-averse, the certainty equivalent of an investment opportunity is shown to be lower. Numerical analysis also reveals that the inverse relationship between certainty equivalent and risk attitude is less sensitive when the market is less incomplete. Finally, the application of valuing an investment opportunity whose project value follows a discrete regime-switching process has been successfully integrated into the utility maximization model.

Copyright

© 2006, the Authors. Published by Atlantis Press.

Open Access

This is an open access article distributed under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

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TY  - CONF
AU  - Yungchih George Wang
PY  - 2006/10
DA  - 2006/10
TI  - Evaluating Uncertain Income Streams under a Regime-Switching Process
BT  - Proceedings of the 9th Joint International Conference on Information Sciences (JCIS-06)
PB  - Atlantis Press
SN  - 1951-6851
UR  - https://doi.org/10.2991/jcis.2006.92
DO  - 10.2991/jcis.2006.92
ID  - Wang2006/10
ER  -