Investment Decisions with Two-Factor Uncertainty

This paper considers investment problems in real options with non-homogeneous two-factor uncertainty. We derive some analytical properties of the resulting optimal stopping problem and present a finite difference algorithm to approximate the firm’s value function and optimal exercise boundary. An im...

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Autores principales:	Tine Compernolle, Kuno J. M. Huisman, Peter M. Kort, Maria Lavrutich, Cláudia Nunes, Jacco J. J. Thijssen
Formato:	article
Lenguaje:	EN
Publicado:	MDPI AG 2021
Materias:	investment analysis optimal stopping time problem two-factor uncertainty Risk in industry. Risk management HD61 Finance HG1-9999
Acceso en línea:	https://doaj.org/article/25ed37a81ea34a8fb0a531267a1a566a
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id	oai:doaj.org-article:25ed37a81ea34a8fb0a531267a1a566a
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spelling	oai:doaj.org-article:25ed37a81ea34a8fb0a531267a1a566a2021-11-25T18:08:37ZInvestment Decisions with Two-Factor Uncertainty10.3390/jrfm141105341911-80741911-8066https://doaj.org/article/25ed37a81ea34a8fb0a531267a1a566a2021-11-01T00:00:00Zhttps://www.mdpi.com/1911-8074/14/11/534https://doaj.org/toc/1911-8066https://doaj.org/toc/1911-8074This paper considers investment problems in real options with non-homogeneous two-factor uncertainty. We derive some analytical properties of the resulting optimal stopping problem and present a finite difference algorithm to approximate the firm’s value function and optimal exercise boundary. An important message in our paper is that the frequently applied quasi-analytical approach underestimates the impact of uncertainty. This is caused by the fact that the quasi-analytical solution does not satisfy the partial differential equation that governs the value function. As a result, the quasi-analytical approach may wrongly advise to invest in a substantial part of the state space.Tine CompernolleKuno J. M. HuismanPeter M. KortMaria LavrutichCláudia NunesJacco J. J. ThijssenMDPI AGarticleinvestment analysisoptimal stopping time problemtwo-factor uncertaintyRisk in industry. Risk managementHD61FinanceHG1-9999ENJournal of Risk and Financial Management, Vol 14, Iss 534, p 534 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	investment analysis optimal stopping time problem two-factor uncertainty Risk in industry. Risk management HD61 Finance HG1-9999
spellingShingle	investment analysis optimal stopping time problem two-factor uncertainty Risk in industry. Risk management HD61 Finance HG1-9999 Tine Compernolle Kuno J. M. Huisman Peter M. Kort Maria Lavrutich Cláudia Nunes Jacco J. J. Thijssen Investment Decisions with Two-Factor Uncertainty
description	This paper considers investment problems in real options with non-homogeneous two-factor uncertainty. We derive some analytical properties of the resulting optimal stopping problem and present a finite difference algorithm to approximate the firm’s value function and optimal exercise boundary. An important message in our paper is that the frequently applied quasi-analytical approach underestimates the impact of uncertainty. This is caused by the fact that the quasi-analytical solution does not satisfy the partial differential equation that governs the value function. As a result, the quasi-analytical approach may wrongly advise to invest in a substantial part of the state space.
format	article
author	Tine Compernolle Kuno J. M. Huisman Peter M. Kort Maria Lavrutich Cláudia Nunes Jacco J. J. Thijssen
author_facet	Tine Compernolle Kuno J. M. Huisman Peter M. Kort Maria Lavrutich Cláudia Nunes Jacco J. J. Thijssen
author_sort	Tine Compernolle
title	Investment Decisions with Two-Factor Uncertainty
title_short	Investment Decisions with Two-Factor Uncertainty
title_full	Investment Decisions with Two-Factor Uncertainty
title_fullStr	Investment Decisions with Two-Factor Uncertainty
title_full_unstemmed	Investment Decisions with Two-Factor Uncertainty
title_sort	investment decisions with two-factor uncertainty
publisher	MDPI AG
publishDate	2021
url	https://doaj.org/article/25ed37a81ea34a8fb0a531267a1a566a
work_keys_str_mv	AT tinecompernolle investmentdecisionswithtwofactoruncertainty AT kunojmhuisman investmentdecisionswithtwofactoruncertainty AT petermkort investmentdecisionswithtwofactoruncertainty AT marialavrutich investmentdecisionswithtwofactoruncertainty AT claudianunes investmentdecisionswithtwofactoruncertainty AT jaccojjthijssen investmentdecisionswithtwofactoruncertainty
_version_	1718411549146611712

Investment Decisions with Two-Factor Uncertainty

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