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The Worst Case for Real Options

M. Trojanowska and Peter Kort
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M. Trojanowska: University of Antwerp

Journal of Optimization Theory and Applications, 2010, vol. 146, issue 3, No 9, 709-734

Abstract: Abstract The problem of the timing of an investment decision under partial information is analyzed in a framework where the firm is ambiguity averse. The analysis yields the description of a robust decision rule for an investment in a finite life project in presence of a stochastic instantaneous return. It is demonstrated that ambiguity aversion may accelerate investment in the short run. Ex post validation of the determined investment policy treats the impact of ambiguity aversion on the proper way of discounting of the profit flow resulting from the project and the fair price of risk associated with ambiguity aversion.

Keywords: Real options; Ambiguity aversion; Endogenous discount factor; Market price of risk; Ex post analysis (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/s10957-010-9687-0

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