Real Options under Choquet-Brownian Ambiguity

David Roubaud (), André Lapied () and Robert Kast
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Robert Kast: LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - UM1 - Université Montpellier 1 - UPVM - Université Paul-Valéry - Montpellier 3 - INRA - Institut National de la Recherche Agronomique - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier

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Abstract: Real 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.

Keywords: Real Options; Ambiguity; Irreversible investment; Optimal stopping; Knightian uncertainty; Choquet-Brownian motions (search for similar items in EconPapers)
Date: 2010-11-08
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00534027v1
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Citations: View citations in EconPapers (7)

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Working Paper: Real Options under Choquet-Brownian Ambiguitys (2010)
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