Investment under Uncertainty - the Case of Repeated Investment Options

Nikolaj Malchow-Moeller and Bo Thorsen
Authors registered in the RePEc Author Service: Nikolaj Malchow-Møller

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper considers optimal investment behaviour when investment options evolve deterministically or stochastically over time and investments are irreversible and indivisible. It extends the standard investment-under-uncertainty set-up with a single investment option to the case of repeated options. Analytical solutions are derived for the deterministic case and for the case of a geometric Brownian motion. It is argued that when investment options are repeated, the simple net-present-value rule in general fares better as an investment criterion than the rule derived from the single-option approach. Furthermore, sensitivity analyses reveal that the effects of parameter changes are very different when using the repeated-options approach instead of the single-option approach.

Keywords: Geometric Brownian motion; indivisibility; investment; irreversibility; repeated options; replacement; stochastic processes; technology; uncertainty (search for similar items in EconPapers)
JEL-codes: D1 D9 O3 Q12 (search for similar items in EconPapers)
Pages: 21
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