An estimation of the dynamic factor demand model with a stochastic differential equation

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This paper has examined and estimated a dynamic factor demand model with a stochastic differential equation on Japanese gas industry. A dynamic factor demand model is usually used to estimate productivity and efficiency on industries such that airlines, automobile, electricity and so on. All most of all researches in this field are built by a translog type cost functions, with Euler equation as a representation of dynamic investment behavior of firms. This research tried to change usual differential equation type's Euler equation to a stochastic differential equation type. This change has made us to find a detail fluctuation on the investment behavior of firms. Each firm in Japanese gas industry makes sometimes not only big-sized lumpy investment but also small-sized investment every year. This research lighted up the easy method of the difference between these two investments on the dynamic optimization root.This paper was paid attention to from the researchers of system science, stochastic analysis and real option's fields.