Luis H. R. Alvarez () (Department of Economics, Turku School of Economics)
Abstract
We investigate within a continuous time setting how Knightian uncertainty characterized by k-ignorance affects the optimal timing policies of a risk-neutral and uncertainty averse investor in the case where the exercise payoff is monotonic. We prove that increased Knightian uncertainty unambiguously decreases the value of the optimal timing policy of an uncertainty averse investor. We also show that higher Knightian uncertainty accelerates timing by shrinking the continuation region whenever the termination payoff is independent of Knightian uncertainty. If this independence condition is not fulfilled, then our results indicate that higher Knightian uncertainty may decelerate optimal timing.
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Publisher Info
Paper provided by Aboa Centre for Economics in its series Discussion Papers with number
25.
Find related papers by JEL classification: C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
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