Optimal Liquidity management and Hedging in the presence of a Non-Predictable Investment Opportunity

Villeneuve, Stéphane and Warin, Xavier (2014) Optimal Liquidity management and Hedging in the presence of a Non-Predictable Investment Opportunity. Mathematical Finance, vol. 8 (n°2). pp. 193-227.

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Official URL: http://tse-fr.eu/pub/27677

Abstract

In this paper, we develop a dynamic model that captures the interaction between a firm’s cash reserves, the risk management policy and the profitability of a non-predictable irreversible investment opportunity. We consider a firm that has assets in place generating a stochastic cash-flow stream. The firm has a non-predictable growth opportunity to expand its operation size by paying a sunk cost. When the opportunity is available, the firm can finance it either by cash or by costly equity issuance. We provide an explicit characterization of the firm strategy in terms of investment, hedging, equity issuance and dividend distribution.

Item Type: Article
Language: English
Date: March 2014
Refereed: Yes
Uncontrolled Keywords: strategic default, payoff dominant equilibrium, constrained optimal stopping time
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:39
Last Modified: 09 Apr 2018 09:03
OAI ID: oai:tse-fr.eu:27677
URI: http://publications.ut-capitole.fr/id/eprint/15754

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