Irreversible investment and discounting: an arbitrage pricing approach

Thijssen, Jacco

doi:10.1007/s10436-008-0108-4

Cited by 20 publications

(4 citation statements)

References 16 publications

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“…This class of discount factors has been introduced to real options in [30]. Proposition 4.1 establishes a close connection between optimal investment decisions in two frameworks: preference-free valuation under the stochastic discount factor and valuation under ambiguity aversion and the deterministic discount factor.…”

Section: Proposition 41 There Exists An Endogenous Discount Factor Smentioning

confidence: 95%

The Worst Case for Real Options

Trojanowska

Kort

2010

J Optim Theory Appl

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The problem of the timing of an investment decision under partial information is analyzed in a framework where the firm is ambiguity averse. The analysis yields the description of a robust decision rule for an investment in a finite life project in presence of a stochastic instantaneous return. It is demonstrated that ambiguity aversion may accelerate investment in the short run. Ex post validation of the determined investment policy treats the impact of ambiguity aversion on the proper way of discounting of the profit flow resulting from the project and the fair price of risk associated with ambiguity aversion.

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Section: Proposition 41 There Exists An Endogenous Discount Factor Smentioning

confidence: 95%

The Worst Case for Real Options

Trojanowska

Kort

2010

J Optim Theory Appl

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“…Alternatively, we could work directly under the objective probability measure and use the firm's stochastic discount factor to value the uncertain cash flows as suggested byThijssen (2010) in a real options setting.…”

mentioning

confidence: 99%

Technological advances and the decision to invest

Flor

Hansen

2012

Ann Finance

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Technological advances impact a firm's investment decision, as they affect the investment cost. They can also affect the profitability due to demand shocks. We study a firm's optimal investment decision when technological advances occur as surprises and induce uncertain reductions in the investment cost and in earnings. Despite this complex setting we derive closed-form solutions for the investment option value and the investment threshold. When technological advances only impact the investment cost, we demonstrate significant contributions compared to existing research, which restricts the analysis by keeping the expected investment cost path constant. For example, we show that, albeit the investment threshold is constant, the option value is very sensitive in the expected impact of technological advances. Leaving the restrictive setting, we obtain more intuitive results, e.g. that more frequent technological advances increase the option value. When technological advances impact future earnings we find important long-term effects: the investment threshold increases, whereas the option value decreases. Finally, earnings volatility postpones investment, while uncertainty due to technological advances expedites investment.

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“…If we assume the absence of arbitrage, then decision-makers must discount uncertain payoffs according to ( Λ t ) t≥0 such that (cf. Thijssen [30])…”

Section: Proof Of Propositionmentioning

confidence: 99%

A model of investment under uncertainty with time to build, market incompleteness and risk aversion

Delaney

2021

European Journal of Operational Research

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In this paper I develop a theoretical framework of irreversible investment under uncertainty in which there is time to build (TTB). The novel aspects of this framework, compared with TTB models in the extant literature, are that the market is incomplete in that not all the uncertainty associated with investing can be diversified away by trading an appropriate spanning asset, and the decision-maker, who acts in the interest of an organisation, is risk averse. I show that models of investment under uncertainty with a TTB, and models of investment under uncertainty with market incompleteness and risk aversion, ought not to be mutually exclusive as they have been in research to date because the recognised results of market incompleteness and risk aversion on the optimal investment strategy are challenged when we incorporate a TTB feature. Conversely, there are also implications on the effect of a TTB when we incorporate market incompleteness and risk aversion. The framework I develop in this paper provides a robust and parsimonious means of facilitating this.

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Irreversible investment and discounting: an arbitrage pricing approach

Abstract: Real options, Discount factors, G31,

Cited by 20 publications

References 16 publications

The Worst Case for Real Options

The Worst Case for Real Options

Technological advances and the decision to invest

A model of investment under uncertainty with time to build, market incompleteness and risk aversion

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