Firm Dynamics with Exogenous and Endogenous Regime Shifts

University Of Texas At Austin, Austin TX

Investigators

Abstract

The research is to develop analytical and computational methods to determine the solutions of optimal stopping and optimal control problems for Levy processes with regime switching. The valuation formulae obtained will be used to discuss economic questions about entry, investment and exit decisions for a competitive firm as well as an industry dynamics. The existing models for these questions are based on many simplifying assumptions. This project will extend these models to some more realistic models which allow discontinuous jumps. It will help further our understanding of the effect of policy changes on issues such as investment activities, job creation and job destruction, new product development and risk sharing. The techniques involved, and their economic implications, are both novel even for the subclass of Gaussian processes with regime switching.