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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)

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    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.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 11 (2010)
    Issue (Month): 2 (November)
    Pages: 313-335

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    Handle: RePEc:cuf:journl:y:2010:v:11:i:2:p:313-335

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    Related research

    Keywords: Irreversible investment; k-ignorance; Risk; Uncertainty; Backward stochastic differential equation (BSDE in short); Conditional g-expectation;

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    References

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    1. Jianjun Miao, 2004. "Risk, uncertainty and option exercise," Finance, EconWPA 0410013, EconWPA.
    2. Epstein, Larry G, 1999. "A Definition of Uncertainty Aversion," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(3), pages 579-608, July.
    3. Zengjing Chen & Larry G. Epstein, 2000. "Ambiguity, risk and asset returns in continuous time," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 474, University of Rochester - Center for Economic Research (RCER).
    4. N. El Karoui & S. Peng & M. C. Quenez, 1997. "Backward Stochastic Differential Equations in Finance," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 7(1), pages 1-71.
    5. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 707-27, November.
    6. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 18(2), pages 141-153, April.
    7. Chen, Zengjing & Kulperger, Reg, 2006. "Minimax pricing and Choquet pricing," Insurance: Mathematics and Economics, Elsevier, vol. 38(3), pages 518-528, June.
    8. Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2007. "Irreversible investment and Knightian uncertainty," Journal of Economic Theory, Elsevier, Elsevier, vol. 136(1), pages 668-694, September.
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    Cited by:
    1. Tamini, Lota D., 2012. "Optimal quality choice under uncertainty on market development," MPRA Paper 40845, University Library of Munich, Germany.
    2. Tamini, Lota Dabio, 2012. "Optimal quality choice under uncertainty on market development," Working Papers, Structure and Performance of Agriculture and Agri-products Industry (SPAA) 148589, Structure and Performance of Agriculture and Agri-products Industry (SPAA).

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