Leaders,followers, and equity risk premiums in booms and busts |
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| Institution: | 1. Graduate School of Economics and Business Administration, Hokkaido University, Kita 9, Nishi 7, Kita-ku, Sapporo 060–0809, Japan;2. Graduate School of Economics, Hitotsubashi University. Naka 2-1, Kunitachi, Tokyo 186-8601, Japan;3. Department of Industrial Administration, Tokyo University of Science, 2641 Yamazaki, Noda-shi, Chiba 278–8510, Japan;1. College of Business Administration, Chonnam National University, Gwangju, South Korea;2. College of Business, Korea Advanced Institute of Science and Technology, Seoul, South Korea;3. Korea Exchange, Busan, South Korea;1. Universität zu Köln and Technische Universität Dortmund, Meister-Ekkehart-Str. 9, 50923 Köln, Germany;2. Universität Leipzig and Technische Universität Dortmund, Grimmaische Str. 12, 04109 Leipzig, Germany;3. FOM Hochschule für Oekonomie & Management, Feldstraße 88, 46535 Dinslaken, Germany |
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| Abstract: | We study an investment problem in which two asymmetric firms face competition and the regime characterizing the economic condition follows a Markov switching process. We derive the value functions and investment thresholds of the leader and follower. The option value of regime uncertainty is found to be quite important for the investment decision of firms. We also show the relationship between the equity risk premium and the economic cycle that has not been done in previous studies, which proxy economic conditions by the level of demand or other state variables. |
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