How to analyze the investment–uncertainty relationship in real option models?

Diderik Lund

Review of Financial Economics, 2005, vol. 14, issue 3-4, 311-322

Abstract: The real options tradition originally predicted a decreasing relationship between uncertainty and investment, through the positive effect of higher uncertainty on the trigger level for revenue relative to costs. An opposing effect on the probability of reaching the level has been identified, yielding a total effect with ambiguous sign. This paper makes three points. The “opposing” effect is not always opposing. Systematic risk cannot generally be assumed to increase with volatility. A probability is not the best measure of investment. The sign of the total effect is again ambiguous. This ambiguity is illustrated, depending on specification of model and parameters.

Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://doi.org/10.1016/j.rfe.2004.10.001

Related works:
Journal Article: How to analyze the investment-uncertainty relationship in real option models? (2005)
Working Paper: How to analyze the investment–uncertainty relationship in real option models? (2003)
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:wly:revfec:v:14:y:2005:i:3-4:p:311-322

Access Statistics for this article

More articles in Review of Financial Economics from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().