Scandinavian Working Papers in Economics
Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance
No 19/12: Competitive investment with varying risk premia
Fredrik Armerin () and Åke Gunnelin ()
Additional contact information
Fredrik Armerin: Department of Real Estate and Construction Management, Royal Institute of Technology, Postal: Teknikringen 10B, 100 44 Stockholm, Sweden
Åke Gunnelin: Department of Real Estate and Construction Management, Royal Institute of Technology, Postal: Teknikringen 10B, 100 44 Stockholm, Sweden
Abstract: This paper considers a model with a time-varying risk premium. The risk premium is driven by a continuous time Markov chain, representing the state in the economy, and the stochastic process generating the cash flows is a Markov-modulated geometric Brownian motion. An existing firm is facing the possibility of competitors entering the market, and due to this, cash flows are limited at levels which are dependent on the state of the economy. This results in a regulated Markov-modulated geometric Brownian motion, and the resulting accumulated supply can have jumps, something that is not possible in a model with only one regime.
Keywords: valuation; competition; Markov-modulated Brownian motion; regulated processes
22 pages, December 20, 2019
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