Download or read book Risk Aversion Price Uncertainty and Irreversible Investments written by Rob Willem Jean van den Goorbergh and published by . This book was released on 2003 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper generalizes the theory of irreversible investment under uncertainty by allowing for risk averse investors in the absence of complete markets. Until now, this theory has only been developed in the cases of risk neutrality or risk aversion in combination with complete markets. Within a general setting, we prove the existence of a unique critical output price that distinguishes price regions in which it is optimal for a risk averse investor to invest and price regions in which one should refrain from investing. We use a class of utility functions that exhibit non-increasing absolute risk aversion to examine the effects of risk aversion, price uncertainty, and other parameters on the optimal investment decision. We find that risk aversion reduces investment, particularly if the investment size is large. Moreover, we find that a rise in price uncertainty increases the value of deferring irreversible investments. This effect is stronger for high levels of risk aversion. In addition, we provide, for the first time, closed-form comparative statics formulas for the risk neutral investor.
Download or read book Risk Aversion Price Uncertainty and Irreversibility of Investments written by Rob W. J. van den Goorbergh and published by . This book was released on 2002 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper generalizes the theory of irreversible investment under uncertainty by allowing for risk averse investors in the absence of complete markets. Until now this theory has only been developed in the cases of risk neutrality, or risk aversion in combination with complete markets. We introduce the class of logistic absolute risk aversion (LARA) utility functions to examine the effects of risk aversion, investment size, and other parameters on the optimal investment decision. We find that risk aversion reduces investment, particularly if the investment size is large. Moreover, we find that a rise in uncertainty increases the value of deferring irreversible investments. This effect is stronger for high levels of risk aversion. In addition, we provide, to the best of our knowlegde for the first time, analytical comparative statics formulas for the risk neutral investor.
Download or read book Risk Aversion Price Uncertainty and Irreversible Investments written by R W J van den Goorbergh and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Irreversibility Uncertainty and Investment written by Robert S. Pindyck and published by World Bank Publications. This book was released on 1989 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Irreversible investment is especially sensitive to such risk factors as volatile exchange rates and uncertainty about tariff structures and future cash flows. If the goal of macroeconomic policy is to stimulate investment, stability and credibility may be more important than tax incentives or interest rates.
Download or read book Investment Capital Market Imperfections and Uncertainty written by Robert Lensink and published by Edward Elgar Publishing. This book was released on 2001-01-01 with total page 176 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book presents an up-to-date overview of the theory as well as the empirics of the relationship between investment, financial imperfections and uncertainty. After reviewing the capital market imperfections literature and the empirical results, the authors discuss both traditional investment models with uncertainty and the more modern option based models. They present an overview of empirical results of the modelling of investment under uncertainty. In these examples the effects of capital market imperfections on investment are carefully considered. The authors conclude that there is overwhelming empirical support for a negative uncertainty-investment relationship. This book should appeal to academics with an interest in investment theory, professionals in the financial sector and students of macroeconomics and finance. "Investment, Capital Market Imperfections, and Uncertainty" assumes only a basic knowledge of mathematics and is easily accessible.
Download or read book Price Uncertainty and Investment Behavior of Corporate Management Under Risk Aversion and Preference for Prudence written by Vesa Kanniainen and published by . This book was released on 1995 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Irreversible Investments and Ambiguity Aversion written by Álvaro Cartea and published by . This book was released on 2017 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: Real option valuation has traditionally been concerned with investment under project value uncertainty while assuming the agent has perfect confidence in a specific model. However, agents do not generally have perfect confidence in their model and this { it ambiguity} affects their decisions. Moreover, real investments are not typically fully spanned by tradable assets--hence markets are inherently incomplete. In this work, we account for the agent's aversion to model ambiguity and address market incompleteness through the notation of { it robust indifference prices}. We derive analytical results for the perpetual option to invest and the linear complementarity problem that the finite time problem satisfies. Ambiguity aversion is found to have dual effects that are similar, but distinct from risk aversion. Agent's are found to exercise options both earlier and later than their ambiguity neutral counterparts, depending on whether ambiguity stems from uncertainty in the investment or a hedging asset.
Download or read book Investment Decision Making Under Uncertainty written by M. Chronopoulos and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Traditional real options analysis addresses investment under uncertainty assuming a risk-neutral decision maker and complete markets. In reality, however, decision makers are often risk averse and markets are incomplete. Additionally, capital projects are seldom now-or-never investments and can be abandoned, suspended, and resumed at any time. In this thesis, we develop a utility-based framework in order to examine the impact of operational flexibility, via suspension and resumption options, on optimal investment policies and option values. Assuming a risk-averse decision maker with perpetual options to suspend and resume a project costlessly, we confirm that risk aversion lowers the probability of investment and demonstrate how this effect can be mitigated by incorporating operational flexibility. Also, we illustrate how increased risk aversion may facilitate the abandonment of a project while delaying its temporary suspension prior to permanent resumption. Besides timing, a firm may have the freedom to scale the investment's installed capacity. We extend the traditional real options approach to investment under uncertainty with discretion over capacity by allowing for a constant relative risk aversion utility function and operational flexibility in the form of suspension and resumption options. We find that, with the option to delay investment, increased risk aversion facilitates investment and decreases the required investment threshold price by reducing the amount of installed capacity. We explore strategic aspects of decision making under uncertainty by examining how duopolistic competition affects the entry decisions of risk-averse investors. Depending on the discrepancy between the market share of the leader and the follower, greater uncertainty may increase or decrease the discrepancy in the non-pre-emptive leader's relative value. Furthermore, risk aversion does not affect the loss in the value of the leader for the pre-emptive duopoly setting, but it makes the loss in value relatively less for the leader in a non-preemptive duopoly setting.
Download or read book Investment in Electricity Generation and Transmission written by Antonio J. Conejo and published by Springer. This book was released on 2016-06-10 with total page 389 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides an in-depth analysis of investment problems pertaining to electric energy infrastructure, including both generation and transmission facilities. The analysis encompasses decision-making tools for expansion planning, reinforcement, and the selection and timing of investment options. In this regard, the book provides an up-to-date description of analytical tools to address challenging investment questions such as: How can we expand and/or reinforce our aging electricity transmission infrastructure? How can we expand the transmission network of a given region to integrate significant amounts of renewable generation? How can we expand generation facilities to achieve a low-carbon electricity production system? How can we expand the generation system while ensuring appropriate levels of flexibility to accommodate both demand-related and production-related uncertainties? How can we choose among alternative production facilities? What is the right time to invest in a given production or transmission facility? Written in a tutorial style and modular format, the book includes a wealth of illustrative examples to facilitate comprehension. It is intended for advanced undergraduate and graduate students in the fields of electric energy systems, operations research, management science, and economics. Practitioners in the electric energy sector will also benefit from the concepts and techniques presented here.
Download or read book Investment Under Uncertainty in Equilibrium written by Robert Novy-Marx and published by . This book was released on 2003 with total page 282 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Essays on Asymmetries Uncertainty and Investment written by Woojin Youn and published by . This book was released on 1998 with total page 366 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Irreversibility Uncertainty and Investment written by Robert S. Pindyck and published by . This book was released on 2010 with total page 75 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most investment expenditures have two important characteristics: First, they are largely irreversible; the firm cannot disinvest, so the expenditures are sunk costs. Second, they can be delayed, allowing the firm to wait for new information about prices, costs, and other market conditions before committing resources. An emerging literature has shown that this has important implications for investment decisions, and for the determinants of investment spending. Irreversible investment is especially sensitive to risk, whether with respect to future cash flows, interest rates, or the ultimate cost of the investment. Thus if a policy goal is to stimulate investment, stability and credibility may be more important than tax incentives or interest rates. This paper presents some simple models of irreversible investment, and shows how optimal investment rules and the valuation of projects and firms can be obtained from contingent claims analysis, or alternatively from dynamic programming. It demonstrates some strengths and limitations of the methodology, and shows how the resulting investment rules depend on various parameters that come from the market environment. It also reviews a number of results and insights that have appeared in the literature recently, and discusses possible policy implications.
Download or read book Dynamic Asset Pricing Theory written by Darrell Duffie and published by Princeton University Press. This book was released on 2010-01-27 with total page 488 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a thoroughly updated edition of Dynamic Asset Pricing Theory, the standard text for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricing results are based on the three increasingly restrictive assumptions: absence of arbitrage, single-agent optimality, and equilibrium. These results are unified with two key concepts, state prices and martingales. Technicalities are given relatively little emphasis, so as to draw connections between these concepts and to make plain the similarities between discrete and continuous-time models. Readers will be particularly intrigued by this latest edition's most significant new feature: a chapter on corporate securities that offers alternative approaches to the valuation of corporate debt. Also, while much of the continuous-time portion of the theory is based on Brownian motion, this third edition introduces jumps--for example, those associated with Poisson arrivals--in order to accommodate surprise events such as bond defaults. Applications include term-structure models, derivative valuation, and hedging methods. Numerical methods covered include Monte Carlo simulation and finite-difference solutions for partial differential equations. Each chapter provides extensive problem exercises and notes to the literature. A system of appendixes reviews the necessary mathematical concepts. And references have been updated throughout. With this new edition, Dynamic Asset Pricing Theory remains at the head of the field.
Download or read book Explicit Investment Rules with Time to Build and Uncertainty written by René Aïd and published by . This book was released on 2017 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: We establish explicit socially optimal rules for an irreversible investment decision with time-to-build and uncertainty. Assuming a price sensitive demand function with a random intercept, we provide comparative statics and economic interpretations for three models of demand (arithmetic Brownian, geometric Brownian, and the Cox-Ingersoll-Ross). Committed capacity, that is, the installed capacity plus the investment in the pipeline, must never drop below the best predictor of future demand, minus two biases. The discounting bias takes into account the fact that investment is paid upfront for future use; the precautionary bias multiplies a type of risk aversion index by the local volatility. Relying on the analytical forms, we discuss in detail the economic effects. For example, the impact of volatility on the optimal investment is negligible in some cases. It vanishes in the CIR model for long delays, and in the GBM model for high discount rates.
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Download or read book Mathematics of Derivative Securities written by Michael A. H. Dempster and published by Cambridge University Press. This book was released on 1997-10-13 with total page 614 pages. Available in PDF, EPUB and Kindle. Book excerpt: During 1995 the Isaac Newton Institute for the Mathematical Sciences at Cambridge University hosted a six month research program on financial mathematics. During this period more than 300 scholars and financial practitioners attended to conduct research and to attend more than 150 research seminars. Many of the presented papers were on the subject of financial derivatives. The very best were selected to appear in this volume. They range from abstract financial theory to practical issues pertaining to the pricing and hedging of interest rate derivatives and exotic options in the market place. Hence this book will be of interest to both academic scholars and financial engineers.
Download or read book Risk Aversion Intertemporal Substitution and the Aggregate Investment uncertainty relationship written by Enrico Salteri and published by . This book was released on 2004 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt:
