Fixed Investment and Capital Flows: A Real Options Approach

Author/Editor:

Jorge A Chan-Lau ; Peter B. Clark

Publication Date:

August 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper draws a link between international capital flows and the real options approach to investment by extending a model of real estate investment. It explains gradual investment, investment booms, and investment during recessions and emphasizes sunk costs, uncertainty, and the value of waiting. The optimal waiting time increases as foreign borrowing becomes more expensive because higher returns are required to cover the sunk costs of investing. The lower the initial level of profitability, the more likely investment will be sequential; conversely, a relatively high initial rate of return will be associated with simultaneous investment.

Series:

Working Paper No. 1998/125

Subject:

Balance of payments Capital flows Competition Emerging and frontier financial markets Financial institutions Financial markets Foreign direct investment Stocks

English

Publication Date:

August 1, 1998

ISBN/ISSN:

9781451937398/1018-5941

Stock No:

WPIEA1251998

Pages:

28

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