Investment Decisions with Two-Factor Uncertainty

T. Compernolle, Kuno Huisman, Peter Kort, Maria Lavrutich, Claudia Nunes, J.J.J. Thijssen

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper considers investment problems in real options with non-homogeneous two-factor uncertainty. It shows that, despite claims made in the literature, the method used to derive an analytical solution in one dimensional problems cannot be straightforwardly extended to problems with two stochastic processes. To illustrate, we analyze an investment problem with two stochastic revenue streams and a constant sunk cost. We show that a semi-analytical approach leads to a sub-optimal investment policy. The main message of our paper is that non-homogeneous investment problems can only be solved numerically
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages21
Volume2018-003
Publication statusPublished - 8 Feb 2018

Publication series

NameCentER Discussion Paper
Volume2018-003

Fingerprint

Uncertainty
Investment decision
Factors
Real options
Analytical solution
Optimal investment
Stochastic processes
Investment policy
Sunk costs
Revenue

Keywords

  • investment analysis
  • optimal stopping time problem
  • two-factor uncertainty

Cite this

Compernolle, T., Huisman, K., Kort, P., Lavrutich, M., Nunes, C., & Thijssen, J. J. J. (2018). Investment Decisions with Two-Factor Uncertainty. (CentER Discussion Paper; Vol. 2018-003). Tilburg: CentER, Center for Economic Research.
Compernolle, T. ; Huisman, Kuno ; Kort, Peter ; Lavrutich, Maria ; Nunes, Claudia ; Thijssen, J.J.J. / Investment Decisions with Two-Factor Uncertainty. Tilburg : CentER, Center for Economic Research, 2018. (CentER Discussion Paper).
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Compernolle, T, Huisman, K, Kort, P, Lavrutich, M, Nunes, C & Thijssen, JJJ 2018 'Investment Decisions with Two-Factor Uncertainty' CentER Discussion Paper, vol. 2018-003, CentER, Center for Economic Research, Tilburg.

Investment Decisions with Two-Factor Uncertainty. / Compernolle, T.; Huisman, Kuno; Kort, Peter; Lavrutich, Maria; Nunes, Claudia; Thijssen, J.J.J.

Tilburg : CentER, Center for Economic Research, 2018. (CentER Discussion Paper; Vol. 2018-003).

Research output: Working paperDiscussion paperOther research output

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Compernolle T, Huisman K, Kort P, Lavrutich M, Nunes C, Thijssen JJJ. Investment Decisions with Two-Factor Uncertainty. Tilburg: CentER, Center for Economic Research. 2018 Feb 8. (CentER Discussion Paper).