Real Options under Choquet-Brownian Ambiguity
AbstractReal options models characterized by the presence of ambiguity have been recently proposed. But based on recursive multiple-priors approaches to solve ambiguity, these seminal models reduce individual preferences to extreme pessimism by considering only the worst case scenario. In contrast, by relying on dynamically consistent Choquet-Brownian motions to model the dynamics of ambiguous expected cash flows, we show that a much broader spectrum of attitudes towards ambiguity may be accounted for. In the case of a perpetual real option to invest, ambiguity aversion delays the moment of exercise of the option, while the opposite holds true for an ambiguity lover.
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Bibliographic InfoPaper provided by HAL in its series Working Papers with number halshs-00534027.
Date of creation: 08 Nov 2010
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Real Options; Ambiguity; Irreversible investment; Optimal stopping; Knightian uncertainty; Choquet-Brownian motions;
Other versions of this item:
- NEP-ALL-2010-11-20 (All new papers)
- NEP-PPM-2010-11-20 (Project, Program & Portfolio Management)
- NEP-UPT-2010-11-20 (Utility Models & Prospect Theory)
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