Fixed Investment and Capital Flows: A Real Options Approach
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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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