Advanced Search
MyIDEAS: Login

Knightian Uncertainty, k-Ignorance, and Optimal Timing

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.ace-economics.fi/kuvat/dp025.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 25.

as in new window
Length: 33
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:tkk:dpaper:dp25

Contact details of provider:
Postal: Rehtorinpellonkatu 3, FIN-20500 TURKU
Phone: +358 2 333 51
Web page: http://ace-economics.fi
More information through EDIRC

Related research

Keywords: Knightian uncertainty; k-ambiguity; optimal stopping; diffusions;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Luis Alvarez & Rune Stenbacka, 2003. "Optimal risk adoption: a real options approach," Economic Theory, Springer, vol. 23(1), pages 123-147, December.
  2. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  3. Epstein, Larry G, 1999. "A Definition of Uncertainty Aversion," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 579-608, July.
  4. Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2007. "Irreversible investment and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 136(1), pages 668-694, September.
  5. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
  6. Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
  7. Alvarez, Luis H. R., 1998. "Exit strategies and price uncertainty: a Greenian approach," Journal of Mathematical Economics, Elsevier, vol. 29(1), pages 43-56, January.
  8. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:tkk:dpaper:dp25. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Aleksandra Maslowska).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.