Real options with constant relative risk aversion

Henderson, Vicky; Hobson, David

doi:10.1016/s0165-1889(01)00052-5

Cited by 118 publications

(98 citation statements)

References 12 publications

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“…Examples of analytical frameworks that incorporate risk aversion into the dynamics of investment decisions include Henderson & Hobson (2002), who extend the real options approach to pricing and hedging assets by taking the perspective of a risk-averse decisionmaker facing incomplete markets. They introduce a second risky asset on which no trading is allowed in the framework of Merton (1969) and address the problem of pricing and hedging this random payoff.…”

Section: Literature Reviewmentioning

confidence: 99%

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Optimal regime switching under risk aversion and uncertainty

Chronopoulos

Lumbreras

2017

European Journal of Operational Research

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Highlights• We develop a regime-switching, utility-based framework for sequential investment• Greater price uncertainty and risk aversion may accelerate regime switching• Greater risk aversion promotes a compulsive and a laggard regime-switching strategy • Higher output price or innovation rate mitigates the impact of risk aversion• A leapfrog/laggard strategy may dominate even when a decisionmaker is risk averse

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Section: Literature Reviewmentioning

confidence: 99%

“…Solving (24), we obtain the expression for the value function F (1) 1 (P ), which is indicated in (25).…”

mentioning

confidence: 99%

Optimal regime switching under risk aversion and uncertainty

Chronopoulos

Lumbreras

2017

European Journal of Operational Research

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“…The endogenous constant, A p 1,2 , and the optimal investment threshold, ε p 1,2 , can be obtained analytically via value-matching and smooth-pasting conditions and are indicated in (20).…”

Section: Proprietary Duopoly Followermentioning

confidence: 99%

Strategic Technology Switching Under Risk Aversion and Uncertainty

Sendstad

Chronopoulos

2017

SSRN Journal

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Sequential investment opportunities or the presence of a rival typically hasten investment under risk neutrality. By contrast, greater price uncertainty or risk aversion increase the incentive to postpone investment in the absence of competition. We analyse how price and technological uncertainty, reflected in the random arrival of innovations, interact with attitudes towards risk to impact both the optimal technology adoption strategy and the optimal investment policy within each strategy, under a proprietary and a non-proprietary duopoly. Results indicate that technological uncertainty increases the follower's investment incentive and delays the entry of the non-proprietary leader, yet it does not affect the proprietary leader's optimal investment policy. Additionally, we show that technological uncertainty decreases the relative loss in the value of the leader due to the follower's entry, while the corresponding impact of risk aversion is ambiguous. Interestingly, we also find that a higher first-mover advantage with respect to a new technology does not affect the leader's entry, and that technological uncertainty may turn a pre-emption game into a war of attrition, where the second-mover gets the higher payoff.

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“…Major contributions along this research line are McDonald and Siegel (1986) and Dixit and Pindyck (1994) among others. Recently, Henderson and Hobson (2002), Miao and Wang (2007), Henderson (2007) and Ewald and Yang (2008) study the real options problem under incomplete markets by utility indifference pricing approach.…”

Section: Introductionmentioning

confidence: 99%

Learning, pricing, timing and hedging of the option to invest for perpetual cash flows with idiosyncratic risk

Song

Wang

Yang

2014

Journal of Mathematical Economics

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The paper considers the option of an investor to invest in a project that generates perpetual cash flows, of which the drift parameter is unobservable. The investor invests in a liquid financial market to partially hedge cash flow risk and estimation risk. We derive two 3-dimensional non-linear free-boundary PDEs satisfied by the utility-based prices of the option and the cash flows. We provide an approach to measure the information value.A numerical procedure is developed. We show that investors have not only idiosyncratic-risk-induced but also estimation-risk-induced precautionary saving demands. A growth of estimation risk, risk aversion or project risk delays investment, but it is accelerated if the project is more closely correlated with the market. Partial information results in a considerable loss, which reaches the peak value at the exercising time and increases with project risk and estimation risk. The more risk-averse the investor or the weaker the correlation, the larger the loss.

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Real options with constant relative risk aversion

Cited by 118 publications

References 12 publications

Optimal regime switching under risk aversion and uncertainty

Optimal regime switching under risk aversion and uncertainty

Strategic Technology Switching Under Risk Aversion and Uncertainty

Learning, pricing, timing and hedging of the option to invest for perpetual cash flows with idiosyncratic risk

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