O'Reilly logo

Finance, Economics, and Mathematics by Robert C. Merton, Oldrich A. Vasicek

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

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Unpublished memorandum, 2013.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 c13-math-0001 on investment is

1 equation

where c13-math-0003 is a Wiener process. The process c13-math-0004 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 c13-math-0005. The dynamics of the state variable, which can be interpreted as representing the state of the production technology, is given by

2 equation

where c13-math-0007 is a Wiener process ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required