Investment Decisions with Two-Factor Uncertainty
Keyword(s):
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.
2002 ◽
Vol 34
(01)
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pp. 141-157
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2002 ◽
Vol 34
(1)
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pp. 141-157
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2005 ◽
Vol 08
(01)
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pp. 123-139
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2009 ◽
Vol 2009
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pp. 1-13
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2014 ◽
Vol 24
(4)
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pp. 1554-1584
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2010 ◽
Vol 27
(02)
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pp. 227-242
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2016 ◽
Vol 53
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pp. 554-571
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1990 ◽
Vol 4
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pp. 493-521
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2018 ◽
Vol 172
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pp. 448-452