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Investment under Uncertainty - the Case of Repeated Investment Options

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  • Nikolaj Malchow-Moeller
  • Bo Jellesmark Thorsen

    ()
    (Department of Economics, University of Aarhus, Denmark)

Abstract

This paper considers optimal investment behaviour when investment options evolve deterministically or stochastically over time and investments are irreversible and indivisible. It extends the standard investment-under-uncertainty set-up with a single investment option to the case of repeated options. Analytical solutions are derived for the deterministic case and for the case of a geometric Brownian motion. It is argued that when investment options are repeated, the simple net-present-value rule in general fares better as an investment criterion than the rule derived from the single-option approach. Furthermore, sensitivity analyses reveal that the effects of parameter changes are very different when using the repeated-options approach instead of the single-option approach.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2000-15.

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Length: 21
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Handle: RePEc:aah:aarhec:2000-15

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Geometric Brownian motion; indivisibility; investment; irreversibility; repeated options; replacement; stochastic processes; technology; uncertainty;

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References

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  1. Sanford J Grossman & Guy Laroque, 2003. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Levine's Working Paper Archive 618897000000000803, David K. Levine.
  2. Cuoco, Domenico & Liu, Hong, 2000. "Optimal consumption of a divisible durable good," Journal of Economic Dynamics and Control, Elsevier, vol. 24(4), pages 561-613, April.
  3. Graham Elliott & Michael Jansson, . "Testing for Unit Roots with Stationary Covariates," Economics Working Papers 2000-6, School of Economics and Management, University of Aarhus.
  4. Caballero, R.J., 1990. "Durable Goods: An Explanation For Their Slow Adjustment," Discussion Papers 1990_49, Columbia University, Department of Economics.
  5. Niels Haldrup & Peter Lildholdt, . "Local Power Functions of Tests for Double Unit Roots," Economics Working Papers 2000-2, School of Economics and Management, University of Aarhus.
  6. Effrosyni Diamantoudi & Licun Xue, 2003. "Farsighted stability in hedonic games," Social Choice and Welfare, Springer, vol. 21(1), pages 39-61, 08.
  7. Rosholm, Michael & Svarer, Michael, 2001. "Structurally Dependent Competing Risks," IZA Discussion Papers 265, Institute for the Study of Labor (IZA).
  8. Licun Xue, . "Stable Agreements in Infinitely Repeated Games," Economics Working Papers 2000-13, School of Economics and Management, University of Aarhus.
  9. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  10. Mauer, David C. & Ott, Steven H., 1995. "Investment under Uncertainty: The Case of Replacement Investment Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(04), pages 581-605, December.
  11. Nikolaj Malchow-Moeller & Bo Jellesmark Thorsen, . "A Dynamic Agricultural Household Model with Uncertain Income and Irreversible and Indivisible Investments under Credit Constraints," Economics Working Papers 2000-7, School of Economics and Management, University of Aarhus.
  12. Hindy, Ayman & Huang, Chi-fu, 1993. "Optimal Consumption and Portfolio Rules with Durability and Local Substitution," Econometrica, Econometric Society, vol. 61(1), pages 85-121, January.
  13. Jamsheed Shorish, . "Quasi-Static Macroeconomic Systems," Economics Working Papers 2000-3, School of Economics and Management, University of Aarhus.
  14. Licun Xue, . "A Notion of Consistent Rationalizability - Between Weak and Pearce's Extensive Form Rationalizability," Economics Working Papers 2000-4, School of Economics and Management, University of Aarhus.
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