2025/02/18 by Fabian Gierens, Gierens, Fabian, Berenice Anne Neumann +1 · 1 citation
Decision Sciences · Economics, Econometrics and Finance · #60G40 #93C41 #93E11 #Economic theories and models #FOS: Mathematics #Optimization and Control (math.OC) #Risk and Portfolio Optimization #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.2502.12661
openalex publication_date 2025/02/18 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We analyze an irreversible investment decision for a project which yields a flow of future operating profits given by a geometric Brownian motion with unknown drift. In contrast to similar optimal stopping problems with incomplete information, the agent's payoff now depends directly on the unknown drift and not only indirectly through the underlying dynamics. Hence, many standard arguments are not applicable. Nonetheless, we show that it is optimal to invest in the project if the current profit level exceeds a threshold depending on the current belief for the true state of the unknown drift. These thresholds are described by a boundary function, for which we establish structural properties like monotonicity and continuity. To prove these, we identify a central class of stopping times with useful features. Moreover, we characterize the boundary function as the unique solution of a nonlinear integral equation. Building on this characterization we compute the boundary function numerically and investigate the value of information.