City Research Online

Abstract

In this article, we study the optimal operational strategy of production projects. We investigate different underlying price models and determine the optimal barriers of transition to suspension, recovery, or irreversible abandonment of productive activity. We compute probabilities of switching between alternative states and the time spent in each state. Our findings suggest that in moderately volatile markets, different model assumptions lead to minimal variations in project strategy. This insight underscores that tractable model approximations can be strategically sound under certain volatility conditions. Our work significantly advances in this direction by demonstrating when and how model simplifications can be made without sacrificing accuracy.

Publication Type:	Article
Additional Information:	© 2025 The Author(s). International Journal of Finance & Economics published by John Wiley & Sons Ltd. This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords:	investment, optimal switching, real options, uncertainty
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Faculty of Actuarial Science & Insurance Bayes Business School > Faculty of Finance
SWORD Depositor:	Symplectic Administrator

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