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A Model for Investments in the Natural Resource Industry with Switching Costs

Department of Statistics, University of Newcastle, Newcastle upon Tyne NE1 7RU, United Kingdom
Department of Mathematics, King's College London, The Strand, London WC2R 2LS, United Kingdom
r.r.lumley{at}ncl.ac.uk
mihail.zervos{at}kcl.ac.uk

We consider a model for investment decisions in the natural resource industry with switching costs. This model gives rise to a problem combining features of both absolutely continuous and impulse stochastic control that we explicitly solve. The solution takes qualitatively different forms, depending on parameter values.

Key Words: Stochastic control; impulse control; optimal switching; real assets; real options
History: Received: January 3, 2000; revision received: November 2, 2000;

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