New Approach to Derive the Value Function of a Firm with Exit Option

Manuel Guerra; Cláudia Nunes; Carlos Oliveira

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arXiv · 1309.5285

New Approach to Derive the Value Function of a Firm with Exit Option

Manuel Guerra·Cláudia Nunes·Carlos Oliveira

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Abstract

In this paper we propose a new way of proving the value of a firm that is currently producing a certain product and faces the option to exit the market. The problem of optimal exiting is an optimal stopping problem, that can be solved using the dynamic programming principle. This approach leads to a partial differential equation, called the Hamilton-Jacobi-Bellman equation. This is a free-boundary problem, and therefore, we propose an approximation for the original model. We prove the convergence of the solution of the approximated problem to the original one and finally, using the Implicit Function Theorem, we obtain this solution.

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BibTeX RIS

Manuel Guerra, Cláudia Nunes, Carlos Oliveira. 2013-09-20. New Approach to Derive the Value Function of a Firm with Exit Option. https://arxiv.org/abs/1309.5285

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