Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions

Christian Riis Flor; Søren Hesel

doi:10.1016/j.jedc.2014.10.011

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

Christian Riis Flor, Søren Hesel

Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › peer review

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 titel	Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions: Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions
Originalsprog	Engelsk
Tidsskrift	Journal of Economic Dynamics and Control
Vol/bind	51
Sider (fra-til)	278-298
ISSN	0165-1889
DOI	https://doi.org/10.1016/j.jedc.2014.10.011
Status	Udgivet - 1. feb. 2015

Emneord

real options
ambiguity
risk/uncertainty effects
correlation effects

Dokumenter og links

10.1016/j.jedc.2014.10.011

Citationsformater

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title = "Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions",

abstract = "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. Ambiguityaversion 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.",

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T1 - Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions

AU - Flor, Christian Riis

AU - Hesel, Søren

PY - 2015/2/1

Y1 - 2015/2/1

N2 - 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. Ambiguityaversion 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.

AB - 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. Ambiguityaversion 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.

KW - real options

KW - ambiguity

KW - risk/uncertainty effects

KW - correlation effects

KW - Ambiguity

KW - Correlation effects

KW - Investment timing

KW - Real options

KW - Risk/uncertainty effects

U2 - 10.1016/j.jedc.2014.10.011

DO - 10.1016/j.jedc.2014.10.011

M3 - Journal article

VL - 51

SP - 278

EP - 298

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

ER -