How to analyze the investment–uncertainty relationship in real option models?

Arbeitspapier

The real options tradition originally predicted a decreasing relationship between uncertainty and investment, through the positive effect of higher uncertainty on the trigger level for revenue relative to costs. An opposing effect on the probability of reaching the level has been identified, yielding a total effect with ambiguous sign. This paper makes three points. The “opposing” effect is not always opposing. Systematic risk cannot generally be assumed to increase with volatility. A probability is not the best measure of investment. The sign of the total effect is again ambiguous. This ambiguity is illustrated, depending on specification of model and parameters.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: EPRU Working Paper Series ; No. 2003-17

Classification and Topics

• Classification: Wirtschaft ; Optimization Techniques; Programming Models; Dynamic Analysis ; Investment; Capital; Intangible Capital; Capacity ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
• Subject: investment ; uncertainty ; real options ; stochastic control ; Risiko ; Investition ; Realoptionsansatz

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lund, Diderik
• Event: Veröffentlichung
• (who): University of Copenhagen, Economic Policy Research Unit (EPRU)
• (where): Copenhagen
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/82028
• Last update: 10.03.2025, 11:45 AM CET