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Author: Rob Willem Jean van den Goorbergh Publisher: ISBN: Category : Languages : en Pages : 20
Book Description
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.
Author: Rob Willem Jean van den Goorbergh Publisher: ISBN: Category : Languages : en Pages : 20
Book Description
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.
Author: Rob W. J. van den Goorbergh Publisher: ISBN: Category : Languages : en Pages : 18
Book Description
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.
Author: Robert S. Pindyck Publisher: World Bank Publications ISBN: Category : Capital investments Languages : en Pages : 58
Book Description
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.
Author: Robert Lensink Publisher: Edward Elgar Publishing ISBN: 9781782541240 Category : Business & Economics Languages : en Pages : 176
Book Description
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.
Author: Álvaro Cartea Publisher: ISBN: Category : Languages : en Pages : 27
Book Description
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.
Author: M. Chronopoulos Publisher: ISBN: Category : Languages : en Pages :
Book Description
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.
Author: Antonio J. Conejo Publisher: Springer ISBN: 3319295012 Category : Business & Economics Languages : en Pages : 389
Book Description
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.
Author: Rob Willem Jean van den Goorbergh
Author: Rob Willem Jean van den Goorbergh
Author: Rob W. J. van den Goorbergh
Author: R W J van den Goorbergh
Author: Robert S. Pindyck
Author: Robert Lensink
Author: Vesa Kanniainen
Author: Álvaro Cartea
Author: M. Chronopoulos
Author: Antonio J. Conejo
Author: Robert Novy-Marx