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A Model of Investment under Uncertainty with Time to Build, Market Incompleteness and Risk Aversion

L. Delaney

Working Papers from Department of Economics, City University London

Abstract: In this paper I develop a theoretical framework of irreversible investment under uncertainty in which there is time to build (TTB). The novel aspects of this framework, compared with TTB models in the extant literature, are that the market is incomplete in that not all the uncertainty associated with investing can be diversified away by trading an appropriate spanning asset, and the decision-maker, who acts in the interest of an organisation, is risk averse. I show that models of investment under uncertainty with a TTB, and models of investment under uncertainty with market incompleteness and risk aversion, ought not to be mutually exclusive as they have been in research to date because the recognised results of market incompleteness and risk aversion on the optimal investment strategy are challenged when we incorporate a TTB feature. Conversely, there are also implications on the effect of a TTB when we incorporate market incompleteness and risk aversion. The framework I develop in this paper provides a robust and parsimonious means of facilitating this.

Keywords: Finance; Investment under Uncertainty; Time to Build; Market Incompleteness; Risk Aversion (search for similar items in EconPapers)
Date: 2020-07-24
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