Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions

Bidragets oversatte titel: Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions: Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions

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Abstrakt

We analyze a firm's investment problem when the dynamics of project value and investment cost are uncertain. We provide an explicit solution using a robust method for an ambiguity averse firm taking this into account. Ambiguity aversion regarding a common risk factor impacts differently than ambiguity aversion regarding investment cost residual risk. Correlation between project value and investment cost matters; ambiguity aversion regarding common risk can decrease the investment probability only if correlation is positive. Ambiguity
aversion regarding residual risk always increases the investment probability. When only project value is risky, volatility can monotonically decrease the investment threshold; this does not hold with the multiple prior method.
Bidragets oversatte titelUncertain Dynamics, Correlation Effects, and Robust Investment Decisions: Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions
OriginalsprogEngelsk
TidsskriftJournal of Economic Dynamics and Control
Vol/bind51
Sider (fra-til)278-298
ISSN0165-1889
DOI
StatusUdgivet - 1. feb. 2015

Emneord

  • real options
  • ambiguity
  • risk/uncertainty effects
  • correlation effects

Citationsformater