December 2015
Intermediate to advanced
368 pages
8h 7m
English
Content preview from Finance, Economics, and Mathematics
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Chapter 13Independence of Production and Technology Risks
Unpublished memorandum, 2013.
The economies investigated in Vasicek (2005, 2013) (Chapters 11 and 12 of this volume) contain a production process whose rate of return 
on investment is
1 
where 
is a Wiener process. The process 
represents a constant return-to-scale production opportunity. The amount of investment in production is determined endogenously.
The parameters of the production process can themselves be stochastic, reflecting the fact that production technology evolves in an unpredictable manner. It is assumed that their behavior is driven by a Markov state variable 
. The dynamics of the state variable, which can be interpreted as representing the state of the production technology, is given by
2 
where 
is a Wiener process ...
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