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Irreversible Investment of the Risk- and Uncertainty-averse DM under k-Ignorance: The Role of BSDE

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  • Zengwu Wang

    (Institute of Finance & Banking, Chinese Academy of Social Sciences)

Abstract

In this paper, the approach of BSDE will be employed to study the irreversible investment problem under k-ignorance when the DM is risk- and uncertainty-averse. For the case of logarithmic utility, we work out the explicit solutions of the value of the utilized patent, the value of the unutilized patent, and the value of the reservation profit. Furthermore, in view of numerical method, the effects of the risk and the uncertainty on the above three parameters are analyzed. All the comparative static results are consistent with our intuition.

Suggested Citation

  • Zengwu Wang, 2010. "Irreversible Investment of the Risk- and Uncertainty-averse DM under k-Ignorance: The Role of BSDE," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 313-335, November.
    • Handle: RePEc:cuf:journl:y:2010:v:11:i:2:p:313-335
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    References listed on IDEAS

    as
    1. Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2007. "Irreversible investment and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 136(1), pages 668-694, September.
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    4. Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
    5. Miao, Jianjun & Wang, Neng, 2011. "Risk, uncertainty, and option exercise," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 442-461, April.
    6. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
    7. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    8. N. El Karoui & S. Peng & M. C. Quenez, 1997. "Backward Stochastic Differential Equations in Finance," Mathematical Finance, Wiley Blackwell, vol. 7(1), pages 1-71, January.
    9. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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    Cited by:

    1. Tamini, Lota Dabio, 2012. "Optimal quality choice under uncertainty on market development," Working Papers 148589, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
    2. Tamini, Lota D., 2012. "Optimal quality choice under uncertainty on market development," MPRA Paper 40845, University Library of Munich, Germany.

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    More about this item

    Keywords

    Irreversible investment; k-ignorance; Risk; Uncertainty; Backward stochastic differential equation (BSDE in short); Conditional g-expectation;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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