Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/227830
Authors: 
Ferrari, Giorgio
Li, Hanwu
Riedel, Frank
Year of Publication: 
2020
Series/Report no.: 
Center for Mathematical Economics Working Papers No. 634
Abstract: 
In this paper, we study an irreversible investment problem under Knightian uncertainty. In a general framework, in which Knightian uncertainty is modeled through a set of multiple priors, we prove existence and uniqueness of the optimal investment plan, and derive necessary and sufficient conditions for optimality. This allows us to construct the optimal policy in terms of the solution to a stochastic backward equation under the worst- case scenario. In a time-homogeneous setting - where risk is driven by a geometric Brownian motion and Knightian uncertainty is realized through a so-called "k-ignorance" - we are able to provide the explicit form of the optimal irreversible investment plan.
Subjects: 
irreversible investment
Knightian uncertainty
singular stochastic control
base capacity policy
first-order conditions for optimality
backward equations
JEL: 
D81
C61
G11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
564.36 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.