The Double Continuation Region
43 Pages Posted: 2 Oct 2007
Date Written: October 2007
Abstract
If the average risk-adjusted growth rate of the project's present value V overcomes the discount rate but is dominated by the average risk-adjusted growth rate of the cost I of entering the project, a non-standard double continuation region can arise: The firm waits to invest in the project if V is insufficiently above I as well as if V is comfortably above I. Under a general framework with jump-diffusive uncertainty, we give exact characterization to the value of the option to invest, to the structure of the double continuation region, and to the subset of the primitives' values that support such a region. The emergence of the double continuation region does not depend on the nature of news (for example, on the presence or absence of jump-like news), for it is empowered by average growth rates.
Keywords: Investment under uncertainty
JEL Classification: G11, G13
Suggested Citation: Suggested Citation