Strategic Technology Adoption and Hedging under Incomplete Markets

53 Pages Posted: 18 Oct 2014 Last revised: 6 Jan 2015

See all articles by Markus Leippold

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Jacob Stromberg

Swiss Finance Institute

Date Written: November 5, 2014

Abstract

We investigate the implications of technological innovation and non-diversifiable risk on entrepreneurial entry and optimal portfolio choice. In a real options model where two risk-averse individuals strategically decide on technology adoption, we show that the impact of non-diversifiable risk on the option timing decision is ambiguous and depends on the frequency of technological change. Compared to the complete market case, non-diversifiable risk may accelerate or delay the optimal investment decision. Moreover, strategic considerations regarding technology adoption play a central role for the entrepreneur's optimal portfolio choice in the presence of non-diversifiable risk.

Keywords: Real Options; Incomplete Markets; Technology Adoption; Optimal Portfolio Choice; Hedging

JEL Classification: G11; G31; E02

Suggested Citation

Leippold, Markus and Stromberg, Jacob, Strategic Technology Adoption and Hedging under Incomplete Markets (November 5, 2014). Swiss Finance Institute Research Paper No. 14-73, Available at SSRN: https://ssrn.com/abstract=2511204 or http://dx.doi.org/10.2139/ssrn.2511204

Markus Leippold (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Jacob Stromberg

Swiss Finance Institute ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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