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Optimal Liquidity management and Hedging in the presence of a non-predictable investment opportunity

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OptimalLiquidity_MAFE_sept2013-1.pdf (432.1Kb)
Date
2014
Dewey
Economie financière
Sujet
Liquidity management; Singular control problem; One-dimensional free boundary problem; Maximum principle
JEL code
G32; G31; G33; G35
Journal issue
Mathematics and Financial Economics
Volume
8
Number
2
Publication date
2014
Article pages
193-227
Publisher
Springer
DOI
http://dx.doi.org/10.1007/s11579-013-0110-0
URI
https://basepub.dauphine.fr/handle/123456789/12476
Collections
  • Chaire Finance et développement durable - Approches quantitatives
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Author
Villeneuve, Stéphane
Warin, Xavier
Type
Article accepté pour publication ou publié
Abstract (EN)
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.

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