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

Yann Braouezec and Robert Joliet ()
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Yann Braouezec: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique

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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)
Date: 2019-05
Note: View the original document on HAL open archive server: https://hal.science/hal-02504260
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Published in Economics Letters, 2019, 178, pp.111-115. ⟨10.1016/j.econlet.2019.03.007⟩

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Journal Article: 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:hal:journl:hal-02504260

DOI: 10.1016/j.econlet.2019.03.007

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