LIQUIDITY PREFERENCE AND KNIGHTIAN UNCERTAINTY

Kiyohiko G. Nishimura and Hiroyuki Ozaki
Additional contact information
Kiyohiko G. Nishimura: The University of Tokyo
Hiroyuki Ozaki: Keio Universityo

No CARF-F-337, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: We consider an infinite-horizon model of a risk-neutral fund-manager who contemplates in each period whether or not to make an irreversible investment which, if made, generates some return under a stochastic environment. Here, the fund-manager evaluates uncertainty by the Choquet expected utility with respect to a convex capacitary kernel and hence she exhibits uncertainty aversion. We provide the exact solution to this problem and show that it takes the form of a reservation strategy: There exists the reservation function such that if the current return exceeds the value of this function, the fund-manager should invest all the money subject to a cash-in-advance constraint; if it does not, she should not make any investment. We also conduct some sensitivity analyses to show that if risk increases in the sense of mean-preserving spread, then the reservation function is raised and that if uncertainty increases in the sense that the set of priors expands, then the reservation function is lowered.

Pages: 41 pages
Date: 2014-01
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/F337.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf337

Access Statistics for this paper

More papers in CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo Contact information at EDIRC.
Bibliographic data for series maintained by ().