Valuing the Option to Invest in an Incomplete Market

Henderson, Vicky

doi:10.2139/ssrn.569865

Cited by 80 publications

(112 citation statements)

References 48 publications

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“…< ∞, and, in line with Henderson (2007) and Hugonnier and Morellec (2013), we assume that the subjective discount rate, ρ, is defined exogenously, and, therefore, is not affected by the decisionmaker's risk preferences, which are reflected solely via the utility function, U (·). Consequently, our analysis can accommodate a wide range of utility functions, e.g., hyperbolic absolute risk aversion (HARA), constant absolute risk aversion (CARA), and constant relative risk aversion (CRRA) utility functions.…”

Section: Assumptions and Notationmentioning

confidence: 99%

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: Assumptions and Notationmentioning

confidence: 99%

Optimal regime switching under risk aversion and uncertainty

Chronopoulos

Lumbreras

2017

European Journal of Operational Research

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“…First, from a modeling perspective, our analysis relates to the papers of Henderson (2005) and Miao and Wang (2005), in which the authors examine the impact of market incompleteness on investment decisions under uncertainty. In these papers, there are no agency conflicts between the decision maker and the owner of the project.…”

Section: Article In Pressmentioning

confidence: 99%

Corporate Control and Real Investment in Incomplete Markets

Hugonnier

Morellec

2006

SSRN Journal

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In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. However, in most situations, corporate executives face incomplete markets either because they receive compensation packages that restrict their portfolios or because cash flows from the firm's investment opportunities are not spanned by those of existing assets. The present paper examines the impact of managerial risk aversion on investment decisions when the manager is exposed to idiosyncratic risk and faces the risk of a control challenge. In the paper, the investment policy selected by the manager reflects a trade-off between his incentives to reduce risk and the need to ensure sufficient efficiency to prevent control challenges. The analysis demonstrates that risk aversion induces the manager to speed up investment, leading to a significant erosion of the value of the option to wait. r

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“…Next, the value function of the proprietary leader in state 1, 2 is described in (19). The first two terms on the top part reflect the expected utility from operating the first technology and the third term is the embedded option to invest in the second one.…”

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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Valuing the Option to Invest in an Incomplete Market

Cited by 80 publications

References 48 publications

Optimal regime switching under risk aversion and uncertainty

Optimal regime switching under risk aversion and uncertainty

Corporate Control and Real Investment in Incomplete Markets

Strategic Technology Switching Under Risk Aversion and Uncertainty

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