Author: Publisher:
ISBN:
Category :
Languages : en
Pages : 19
Book Description
Optimal Investment Decisions when Time-horizon is Uncertain
Author: Investment under Uncertainty
Author: Robert K. DixitPublisher: Princeton University Press
ISBN: 1400830176
Category : Business & Economics
Languages : en
Pages : 484
Book Description
How should firms decide whether and when to invest in new capital equipment, additions to their workforce, or the development of new products? Why have traditional economic models of investment failed to explain the behavior of investment spending in the United States and other countries? In this book, Avinash Dixit and Robert Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made. In so doing, they answer important questions about investment decisions and the behavior of investment spending. This new approach to investment recognizes the option value of waiting for better (but never complete) information. It exploits an analogy with the theory of options in financial markets, which permits a much richer dynamic framework than was possible with the traditional theory of investment. The authors present the new theory in a clear and systematic way, and consolidate, synthesize, and extend the various strands of research that have come out of the theory. Their book shows the importance of the theory for understanding investment behavior of firms; develops the implications of this theory for industry dynamics and for government policy concerning investment; and shows how the theory can be applied to specific industries and to a wide variety of business problems.
Time-Consistency of Optimal Investment Under Smooth Ambiguity
Author: Anne BalterPublisher:
ISBN:
Category :
Languages : en
Pages : 35
Book Description
We study portfolio choice in a Black-Scholes world under drift uncertainty. Preferences towards risk and ambiguity are modeled using the smooth ambiguity approach under a double power utility assumption and a normal distribution assumption on the unknown drift. Optimal investment in this setting is time-inconsistent: While utility is maximized by a precommitment strategy resembling the classical Merton solution, the investor's future selves prefer to constantly increase the riskiness of the strategy. In contrast, the optimal dynamically consistent investment strategy accounts for variations in the perceived severity of drift uncertainty, thus increasing the riskiness of the strategy gradually over time. We provide a detailed comparative analysis of the mechanics and interplay of ambiguity, myopia and optimal decisions in this setting. We show that an investor who pre-commits will regret that decision from some time point onwards, wishing that she had followed the dynamically consistent strategy. This “point of regret” always lies near the middle of the investment horizon.
Uncertain Growth Cycles, Corporate Investment, and Dynamic Hedging
Author: Adam YoncePublisher:
ISBN:
Category :
Languages : en
Pages : 240
Book Description
In the theory of finance, uncertainty plays a crucial role. Economists often use the terms uncertainty and volatility interchangeably, yet volatility is not the only form of uncertainty. Firms face uncertainty about whether the economy is in an expansionary or recessionary state, industries face regulatory uncertainty, and individuals face uncertainty about risk premia. In this dissertation, I consider the role that uncertainty about growth rates, regulatory policy, and risk premia play in the investment decisions of firms and individuals. The key theme linking the three chapters is learning in dynamic environments. In Chapter 1, I study the effects of demand growth uncertainty on corporate investment decisions. In particular, how does uncertainty about the state of the economy and the state of demand growth affect a firm's decision to allocate capital to irreversible investment projects? In the model, firms are able to choose both the timing and scale of their investments, and the optimal scale will depend on the unobserved state of demand growth. This second decision gives rise to an incentive to delay investment that does not exist in standard real option models: When investment is irreversible, firms risk allocating a sub-optimal level of capital to a project. Theoretically, I show how this incentive to delay is closely linked to the benefits of learning about the economy. Empirically, using estimated probabilities filtered from GDP growth, I find that 1) beliefs about the economy inform corporate investment decisions, and 2) the relationship between investment and beliefs is quadratic. In Chapter 2, I study an empirical extension of the model. Many industries in the United States face regulatory uncertainty, and a natural conjecture is that increased regulatory uncertainty has a dampening effect on investment if 1) regulatory policy affects the cash flows of the firm, 2) firms have flexibility over the scale of their investments, and 3) regulatory uncertainty resolves quickly. While regulatory uncertainty is not observable, I consider two proxies: A variable indicating Presidential election years, and a variable indicating divided government. The former is meant to capture policy uncertainty associated with the possibility of a change in government, while the latter is meant to capture policy uncertainty associated with ideological variance. Empirically, both measures are associated with a decrease in corporate investment rates, consistent with the theoretical framework. The second purpose of this chapter is to highlight the dangers of making inferences about investment using inconsistent estimators and regressions that fail to account for plausible alternative hypotheses. Previous work linking investment to the political cycle relies on least squares estimators that are inconsistent because the firm-specific control variables are endogenous to the investment decision. For a specific sub-sample of non-manufacturing firms, I show that least squares estimates easily reject the null hypothesis, while consistent first-difference estimates fail to do so. Finally, I include a control for the fiscal environment of the federal government, which helps to uncover important dynamics between investment, the budget deficit, and the election cycle. In chapter 3, I consider the currency hedging problem of a risk-averse international investor who faces an unobservable currency risk premium. A non-zero risk premium introduces a speculative motive for holding foreign currency in the optimal portfolio, and a time-varying risk premium introduces a market-timing strategy. Uncertainty about the stochastic properties of the risk premium significantly tames both the speculative and market timing components, especially at long investment horizons, and the optimal hedge approaches a complete hedge as risk aversion and the investment horizon increase. However, an investor who ignores the risk premium and fully hedges foreign investments faces a substantial opportunity cost because she forgoes the benefits of dynamic learning.
Time Horizons and Technology Investments
Author: National Academy of EngineeringPublisher: National Academies Press
ISBN: 0309046475
Category : Political Science
Languages : en
Pages : 119
Book Description
It is frequently argued that U.S. corporations have shorter time horizons for planning and investment than their Japanese and German competitors. This argument, though widely accepted in studies of U.S. competitiveness, has rarely been examined in depth. Time Horizons and Technology Investments explores the evidence that some U.S. corporations consistently select projects biased toward short-term return and addresses factors influencing the time-related preferences of U.S. corporate managers in selecting projects for investment. It makes recommendations to policymakers and managers about policies to mitigate negative external influences and about strategies to remove internal biases toward noncompetitive decisions.
A Decision Theoretic Approach to Optimal Investment Decisions and an Optimal Financial Structure Under Risk
Author: Franz Josef SosnowskiPublisher:
ISBN:
Category : Capital budget
Languages : en
Pages : 518
Book Description
Sequential Binary Investment Decisions
Author: Werner JammerneggPublisher: Springer Science & Business Media
ISBN: 364246646X
Category : Business & Economics
Languages : en
Pages : 167
Book Description
This book describes some models from the theory of investment which are mainly characterized by three features. Firstly, the decision-maker acts in a dynamic environment. Secondly, the distributions of the random variables are only incompletely known at the beginning of the planning process. This is termed as decision-making under conditions of uncer tainty. Thirdly, in large parts of the work we restrict the analysis to binary decision models. In a binary model, the decision-maker must choose one of two actions. For example, one decision means to undertake the invest ·ment project in a planning period, whereas the other decision prescribes to postpone the project for at least one more period. The analysis of dynamic decision models under conditions of uncertainty is not a very common approach in economics. In this framework the op timal decisions are only obtained by the extensive use of methods from operations research and from statistics. It is the intention to narrow some of the existing gaps in the fields of investment and portfolio analysis in this respect. This is done by combining techniques that have been devel oped in investment theory and portfolio selection, in stochastic dynamic programming, and in Bayesian statistics. The latter field indicates the use of Bayes' theorem for the revision of the probability distributions of the random variables over time.
The Investment Decision Under Uncertainty
Author: Donald Eugene FarrarPublisher:
ISBN:
Category : Capital investments
Languages : en
Pages : 112
Book Description
Essays on Investment Decisions Under Large Uncertainty
Author: Natasa BilkicOptimal Financial Decision Making under Uncertainty
Author: Giorgio ConsigliPublisher: Springer
ISBN: 3319416138
Category : Business & Economics
Languages : en
Pages : 310
Book Description
The scope of this volume is primarily to analyze from different methodological perspectives similar valuation and optimization problems arising in financial applications, aimed at facilitating a theoretical and computational integration between methods largely regarded as alternatives. Increasingly in recent years, financial management problems such as strategic asset allocation, asset-liability management, as well as asset pricing problems, have been presented in the literature adopting formulation and solution approaches rooted in stochastic programming, robust optimization, stochastic dynamic programming (including approximate SDP) methods, as well as policy rule optimization, heuristic approaches and others. The aim of the volume is to facilitate the comprehension of the modeling and methodological potentials of those methods, thus their common assumptions and peculiarities, relying on similar financial problems. The volume will address different valuation problems common in finance related to: asset pricing, optimal portfolio management, risk measurement, risk control and asset-liability management. The volume features chapters of theoretical and practical relevance clarifying recent advances in the associated applied field from different standpoints, relying on similar valuation problems and, as mentioned, facilitating a mutual and beneficial methodological and theoretical knowledge transfer. The distinctive aspects of the volume can be summarized as follows: Strong benchmarking philosophy, with contributors explicitly asked to underline current limits and desirable developments in their areas. Theoretical contributions, aimed at advancing the state-of-the-art in the given domain with a clear potential for applications The inclusion of an algorithmic-computational discussion of issues arising on similar valuation problems across different methods. Variety of applications: rarely is it possible within a single volume to consider and analyze different, and possibly competing, alternative optimization techniques applied to well-identified financial valuation problems. Clear definition of the current state-of-the-art in each methodological and applied area to facilitate future research directions.