Robust Investment Decisions and the Value of Waiting to Invest

45 Pages Posted: 3 Oct 2011

See all articles by Christian Riis Flor

Christian Riis Flor

University of Southern Denmark

Søren Hesel

University of Southern Denmark - Department of Business and Economics

Date Written: August 1, 2011

Abstract

We solve a firm’s investment problem when there is uncertainty about the growth rate of the project value and the investment cost, and the firm is ambiguity averse. We use a robust method to take this into account and provide explicit solution to the value of the option to invest. Ambiguity aversion decreases the investment threshold and volatility increases the impact of ambiguity aversion. We show that correlation between the project and the investment costs have a significant effect to ambiguity. Hence, ambiguity aversion is an important aspect to take into account when the firm considers its investment strategy.

Keywords: Real options, Ambiguity, Robustness, Correlation effects.

JEL Classification: G31, D81

Suggested Citation

Flor, Christian Riis and Hesel, Søren, Robust Investment Decisions and the Value of Waiting to Invest (August 1, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1928403 or http://dx.doi.org/10.2139/ssrn.1928403

Christian Riis Flor (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense DK-5230
Denmark
+45 6550 3384 (Phone)
+45 6593 0726 (Fax)

Søren Hesel

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

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