Real Options, Ambiguity, and Dynamic Consistency - A Technical Note

International Journal of Production Economics, forthcoming

6 Pages Posted: 5 Apr 2020 Last revised: 24 Apr 2020

See all articles by David Schröder

David Schröder

University of London - Birkbeck College

Date Written: April 24, 2020

Abstract

Recent research on real options does not only consider optimal investment decisions under risk, but also under ambiguity. However, most models that allow for ambiguity are generally not dynamically consistent. Examples are, among others, the $\alpha$-MEU model, the imprecision aversion model, or the NMEU model. Dynamic consistency is however required to solve optimal stopping real options problems analytically or in closed-form. This paper highlights the resulting difficulties, which are often overlooked, exemplarily for the NMEU model.

Keywords: Ambiguity, dynamic consistency, real options, NMEU preferences, rectangularity, optimal stopping

JEL Classification: D81, G11

Suggested Citation

Schroeder, David, Real Options, Ambiguity, and Dynamic Consistency - A Technical Note (April 24, 2020). International Journal of Production Economics, forthcoming, Available at SSRN: https://ssrn.com/abstract=3552142 or http://dx.doi.org/10.2139/ssrn.3552142

David Schroeder (Contact Author)

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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