Publication
Title
Hysteresis due to irreversible exit : addressing the option to mothball
Author
Abstract
This paper analyses the following hitherto understudied feature in real switching options: a firm has a mothballing option and an option to permanently abandon. If the firm finds itself in an operating mode with a price just above the abandonment threshold, it is un-clear whether to exercise the abandonment option or to exercise the mothballing option. If the price goes down, the firm may exit, but, surprisingly, if it goes up, it may mothball. We find that two different strategies could be optimal: one where mothballing is not a viable option and one where mothballing does occur. In the latter case a hysteresis region arises in which the firm produces at a loss, while a further price decrease induces exit and a sufficient price increase results in the firm entering the mothballing stage. Mothballing being optimal requires sufficiently large values of the price trend and the uncertainty parameter. (C) 2018 Elsevier B.V. All rights reserved.
Language
English
Source (journal)
Journal of economic dynamics and control. - Amsterdam, 1979, currens
Publication
Amsterdam : North-Holland, 2018
ISSN
0165-1889 [print]
1879-1743 [online]
Volume/pages
92(2018), p. 69-83
ISI
000441655900004
Full text (Publisher's DOI)
Full text (publisher's version - intranet only)
UAntwerpen
Faculty/Department
Research group
Publication type
Subject
Affiliation
Publications with a UAntwerp address
External links
Web of Science
Record
Identification
Creation 07.09.2018
Last edited 15.07.2021
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