The Double Continuation Region

43 Pages Posted: 2 Oct 2007

See all articles by Alessandro Sbuelz

Alessandro Sbuelz

Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Anna Battauz

Bocconi University - Department of Finance

Marzia De Donno

Catholic University of Milan

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

Sbuelz, Alessandro and Battauz, Anna and De Donno, Marzia, The Double Continuation Region (October 2007). Available at SSRN: https://ssrn.com/abstract=1018624 or http://dx.doi.org/10.2139/ssrn.1018624

Alessandro Sbuelz (Contact Author)

Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics ( email )

largo A. Gemelli 1
I-20123 Milan
Italy
+39 02 7234 2345 (Phone)
+39 02 7234 2671 (Fax)

HOME PAGE: http://ppd.unicatt.it/docenti/alessandro_sbuelz

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Anna Battauz

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Marzia De Donno

Catholic University of Milan ( email )

Milan, ID
Italy

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