OPTIMAL INVESTMENT TIMING USING MARKOV

In this work, we address an investment problem where the investment can either be made imme-diately or postponed to a later time, in the hope that market conditions become more favourable. In our case, uncertainty is introduced through market price. When the investment is undertaken, a fixed sunk cost must be paid and a series of cash flows are to be received. Therefore, we are faced with an irreversible investment. Real options analysis provides an adequate framework for this type of problems by recognizing these two characteristics, uncertainty and irreversibil-ity, explicitly. We describe algorithmic solutions for this type of problems by modelling market prices evolution by Markov jump processes