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Valuing an investment project using no-arbitrage and the alpha-maxmin criteria: From Knightian uncertainty to risk

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  • Braouezec, Yann
  • Joliet, Robert

Abstract

We consider a two-period irreversible investment decision problem in which the firm can either invest in period 0 or in period 1. The firm is assumed to be able to specify a set of three scenarios or more but not a probability measure. Assuming the option to wait is valued with the no-arbitrage principle, when the firm makes use of the criteria α-maxmin, we show the firm ends up with a known probability measure that assigns a positive probability to three or four scenarios only.

Suggested Citation

  • Braouezec, Yann & Joliet, Robert, 2019. "Valuing an investment project using no-arbitrage and the alpha-maxmin criteria: From Knightian uncertainty to risk," Economics Letters, Elsevier, vol. 178(C), pages 111-115.
    • Handle: RePEc:eee:ecolet:v:178:y:2019:i:c:p:111-115
    DOI: 10.1016/j.econlet.2019.03.007
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    References listed on IDEAS

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    More about this item

    Keywords

    Knightian uncertainty; Investment decision; Option to wait; No-arbitrage; α-maxmin;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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