Public stimulus to private investment and prevention of disinvestment: A CEV approach

• Autor(a) principal: Subtil, Célia dos Santos
• Data de Publicação: 2022
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/30077
• topic: Investment decisions; Public stimulus; Private investment; Opções reais -- Real options; CEV model; Decisões de investimento; Estímulo público; Investimento privado; Modelo CEV

Taking into consideration the atypical times caused by COVID-19 and the war between Russia and Ukraine, which have created great economic uncertainty, we sought to study how a government constrained by its financial situation could implement an expansionary policy to stimulate its economy. As an answer to this problem, this dissertation looks into the optimal way for the public sector to stimulate immediate private investment or, at the least, prevent disinvestment from the private sector. We use a Real Options approach and take the work of Barbosa et al. (2016), expanding upon their work, which focuses on the stimulation of immediate investment under a Geometric Brownian Motion (GBM) model, to include prevention of disinvestment and derive the expressions for both issues under a more complex Constant Elasticity of Variance (CEV) model. This way, we aim to keep the relevant macroeconomic factors considered but improve on the realism and precision of the results obtained. Moreover, we do an application of both models, through which we compare our results to the ones obtained by Barbosa et al, (2016) and compare the GBM to the CEV model. We conclude that assuming a GBM stochastic process when the true generation process corresponds to the CEV model leads to an underestimation of the effort to be done in order to stimulate immediate investment or prevent disinvestment and, hence, incentive policies put in place by the government with the GBM assumption will not reap the desired outcomes.