Robust Investment Decisions and the Value of Waiting to Invest
45 Pages Posted: 3 Oct 2011
Date Written: August 1, 2011
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: Suggested Citation