Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099499 | Journal of Economic Dynamics and Control | 2011 | 13 Pages |
Abstract
The problem of irreversible investment with idiosyncratic risk is studied by interpreting market incompleteness as a source of ambiguity over the appropriate no-arbitrage discount factor. The maxmin utility over multiple priors framework is used to model and solve the irreversible investment problem. Multiple priors are modeled using the notion of 뼉ignorance. This set-up is used to analyze finitely lived options. For infinitely lived options the notion of constant 뼉ignorance is introduced. For these sets of density generators the corresponding optimal stopping problem is solved for general (in-)finite horizon optimal stopping problems driven by geometric Brownian motion. It is argued that an increase in the set of priors delays investment, whereas an increase in the degree of market completeness can have a non-monotonic effect on investment.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Jacco J.J. Thijssen,