Valuing an investment project using no-arbitrage and the alpha-maxmin criteria: From Knightian uncertainty to risk

Yann Braouezec and Robert Joliet ()

Economics Letters, 2019, vol. 178, issue C, 111-115

Abstract: We consider a two-period irreversible investment decision problem in which the firm can either invest in period 0 or in period 1. The firm is assumed to be able to specify a set of three scenarios or more but not a probability measure. Assuming the option to wait is valued with the no-arbitrage principle, when the firm makes use of the criteria α-maxmin, we show the firm ends up with a known probability measure that assigns a positive probability to three or four scenarios only.

Keywords: Knightian uncertainty; Investment decision; Option to wait; No-arbitrage; α-maxmin (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Valuing an investment project using no-arbitrage and the alpha-maxmin criteria: From Knightian uncertainty to risk (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:178:y:2019:i:c:p:111-115

DOI: 10.1016/j.econlet.2019.03.007

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