Investment Under Uncertainty - the Case of Repeated Investment Options
U of Aarhus Working Paper No. 2000-15
Posted: 17 Aug 2001
This paper considers optimal investment behaviour when investment options evolve deterministically or stochastically over time and investments are irreversible and indivisible. It extends the standard investment-under-uncertainty set-up with a single investment option to the case of repeated options. Analytical solutions are derived for the deterministic case and for the case of a geometric Brownian motion. It is argued that when investment options are repeated, the simple net-present-value rule in general fares better as an investment criterion than the rule derived from the single-option approach. Furthermore, sensitivity analyses reveal that the effects of parameter changes are very different when using the repeated-options approach instead of the single-option approach.
JEL Classification: D1, D9, O3, Q12
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