A Knightian irreversible investment problem

Arbeitspapier

In this paper, we study an irreversible investment problem under Knightian uncertainty. In a general framework, in which Knightian uncertainty is modeled through a set of multiple priors, we prove existence and uniqueness of the optimal investment plan, and derive necessary and sufficient conditions for optimality. This allows us to construct the optimal policy in terms of the solution to a stochastic backward equation under the worst- case scenario. In a time-homogeneous setting - where risk is driven by a geometric Brownian motion and Knightian uncertainty is realized through a so-called "k-ignorance" - we are able to provide the explicit form of the optimal irreversible investment plan.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Center for Mathematical Economics Working Papers ; No. 634

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Optimization Techniques; Programming Models; Dynamic Analysis ; Portfolio Choice; Investment Decisions
• Subject: irreversible investment ; Knightian uncertainty ; singular stochastic control ; base capacity policy ; first-order conditions for optimality ; backward equations

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ferrari, Giorgio ; Li, Hanwu ; Riedel, Frank
• Event: Veröffentlichung
• (who): Bielefeld University, Center for Mathematical Economics (IMW)
• (where): Bielefeld
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/227830
• URN: urn:nbn:de:0070-pub-29422529
• Last update: 10.03.2025, 11:46 AM CET