Optimal hedging with a regime-switching time-varying correlation GARCH model

2007 ◽  
Vol 27 (5) ◽  
pp. 495-516 ◽  
Author(s):  
Hsiang-Tai Lee ◽  
Jonathan Yoder
Keyword(s):  
Regime Switching ◽  
Switching Time ◽  
Garch Model ◽  
Time Varying ◽  
Optimal Hedging

Optimal investment with time-varying transition probabilities for regime switching

2021 ◽  
Vol 29 (2) ◽  
pp. 102-115
Author(s):  
Hyo-Chan Lee ◽  
Seyoung Park ◽  
Jong Mun Yoon
Keyword(s):  
Regime Switching ◽  
Transition Probabilities ◽  
Optimal Investment ◽  
Cash Flows ◽  
Optimal Timing ◽  
Time Varying ◽  
Content Type ◽  
Stochastic Nature ◽  
Optimal Thresholds

Abstract This study aims to generalize the following result of McDonald and Siegel (1986) on optimal investment: it is optimal for an investor to invest when project cash flows exceed a certain threshold. This study presents other results that refine or extend this one by integrating timing flexibility and changes in cash flows with time-varying transition probabilities for regime switching. This study emphasizes that optimal thresholds are either overvalued or undervalued in the absence of time-varying transition probabilities. Accordingly, the stochastic nature of transition probabilities has important implications to the search for optimal timing of investment.

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