Investment decisions with two-factor uncertainty

Artikel

This paper considers investment problems in real options with non-homogeneous two-factor uncertainty. We derive some analytical properties of the resulting optimal stopping problem and present a finite difference algorithm to approximate the firm's value function and optimal exercise boundary. An important message in our paper is that the frequently applied quasi-analytical approach underestimates the impact of uncertainty. This is caused by the fact that the quasi-analytical solution does not satisfy the partial differential equation that governs the value function. As a result, the quasi-analytical approach may wrongly advise to invest in a substantial part of the state space.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Journal of Risk and Financial Management ; ISSN: 1911-8074 ; Volume: 14 ; Year: 2021 ; Issue: 11 ; Pages: 1-17 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft
• Subject: investment analysis ; optimal stopping time problem ; two-factor uncertainty

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Compernolle, Tine ; Huisman, Kuno J. M. ; Kort, Peter M. ; Lavrutich, Maria ; Nunes, Cláudia ; Thijssen, Jacco J. J.
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2021

Further information

• DOI: doi:10.3390/jrfm14110534
• Handle: http://hdl.handle.net/10419/258637
• Last update: 10.03.2025, 11:41 AM CET