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Investment under Uncertainty - the Case of Repeated Investment Options

  • Nikolaj Malchow-Moeller
  • Bo Jellesmark Thorsen

    ()

    (Department of Economics, University of Aarhus, Denmark)

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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File URL: ftp://ftp.econ.au.dk/afn/wp/00/wp00_15.pdf
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Paper provided by Department of Economics and Business Economics, Aarhus University in its series Economics Working Papers with number 2000-15.

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Handle: RePEc:aah:aarhec:2000-15
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Niels Haldrup & Peter Lildholdt, 2005. "Local power functions of tests for double unit roots," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 59(2), pages 159-179.
  2. Rosholm, Michael & Svarer, Michael, 2001. "Structurally Dependent Competing Risks," IZA Discussion Papers 265, Institute for the Study of Labor (IZA).
  3. Graham Elliott & Michael Jansson, . "Testing for Unit Roots with Stationary Covariates," Economics Working Papers 2000-6, Department of Economics and Business Economics, Aarhus University.
  4. Effrosyni Diamantoudi & Licun Xue, 2003. "Farsighted stability in hedonic games," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 21(1), pages 39-61, 08.
  5. Licun Xue, . "Stable Agreements in Infinitely Repeated Games," Economics Working Papers 2000-13, Department of Economics and Business Economics, Aarhus University.
  6. Ricardo J. Caballero, 1991. "Durable Goods: An Explanation for Their Slow Adjustment," NBER Working Papers 3748, National Bureau of Economic Research, Inc.
  7. 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, Department of Economics and Business Economics, Aarhus University.
  8. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
  9. Jamsheed Shorish, . "Quasi-Static Macroeconomic Systems," Economics Working Papers 2000-3, Department of Economics and Business Economics, Aarhus University.
  10. Domenico Cuoco & Hong Liu, . "Optimal Consumption of a Divisible Durable Good," Rodney L. White Center for Financial Research Working Papers 20-98, Wharton School Rodney L. White Center for Financial Research.
  11. 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.
  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. 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.
  14. Licun Xue, . "A Notion of Consistent Rationalizability - Between Weak and Pearce's Extensive Form Rationalizability," Economics Working Papers 2000-4, Department of Economics and Business Economics, Aarhus University.
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