Analysis on Model of Investment under Interest Rate Uncertainty

Abstract

In order to make investment model targeted and practical, the disturbance in the right side of the capital accumulation equation in the model should be clarified and thus a model of stochastic investment under interest rate uncertainty should be established. The research is based upon Calcagnini's thought, but the method is improved. When the interest rate is fixed, enterprise expects the marginal expected present value of capital to be equal to the cost of capital. In the research about uncertain interest rate model, it is found that when investment is reversible, increasing investment during the fluctuation of interest rate will make the expected discounted profit rise.