Optimal Investment Strategy under Stochastic Interest Rates
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Date
2017-05-19
Journal Title
Journal ISSN
Volume Title
Publisher
Journal of Mathematical Finance
Abstract
We study how firms’ management can make effective investment decision
under the influence of random interest rates. We define the threshold interest
rate value below which investment can be effectively done and above which
investment is not optimal. We use a stochastic differential equation with alternating
drift to find the optimal investment policy under stochastic interest
rate. One of our results indicated that, the optimal condition for investment
expansion is when the interest rate is low and the profit level is high. Also,
there exists the threshold interest rate value which forms the basis for investment
decision of a company. Moreover, we revealed that it is not optimal for
the managers to plan for firm’s business expansion when is already making
extremely high profits. At the end we were able to confirm that business is
generally more stable when the interest rates are lower than those when they
are high. Since firms in emerging economies suffer most from interest rate
fluctuations, they need more effective investment strategies. Monetary policy
makers of such economies need to ensure low interest rates in order to promote
firms’ investment and therefore boost the general economy.
Description
Keywords
Research Subject Categories::MATHEMATICS, FINANCIAL MATHEMATICS, MATHEMATICAL MODELLING, STOCHASTIC CONTROL
Citation
Mtunya, A.P., Ngare, P. and Nkansah-Gyekye, Y. (2017) Optimal Investment Strategy under Stochastic Interest Rates. Journal of Mathematical Finance , 7, 319-332. https://doi.org/10.4236/jmf.2017.72017