Re-examining the investment-uncertainty relationship in a real options model

Re-examining the investment-uncertainty relationship in a real options model The main purpose of this paper is to re-examine the investment-uncertainty relationship in a real options model, and demonstrates that the Sarkar (J Econ Dyn Control 24:219–225, 2000) model is a special case of our model. This paper uses a general dynamic process, which incorporates mean reversion and jumps in a firm’s project earnings. We further derive a quasi-analytical form solution for the critical investment value and investment probability of a firm’s projects. From the simulation results, we find that an increase in uncertainty can always lead to an increase in the probability of investment, and thus has a positive impact on investment. These results, which differ from the findings of Sarkar (J Econ Dyn Control 24:219–225, 2000), could be explained by the mean-reversion and jump effects on a firm’s earnings. Review of Quantitative Finance and Accounting Springer Journals

Re-examining the investment-uncertainty relationship in a real options model

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Springer US
Copyright © 2011 by Springer Science+Business Media, LLC
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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    Bessembinder, H; Coughenour, JF; Seguin, PJ; Smoller, MM

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