Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/258637 
Year of Publication: 
2021
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 14 [Issue:] 11 [Article No.:] 534 [Publisher:] MDPI [Place:] Basel [Year:] 2021 [Pages:] 1-17
Publisher: 
MDPI, Basel
Abstract: 
This paper considers investment problems in real options with non-homogeneous two-factor uncertainty. We derive some analytical properties of the resulting optimal stopping problem and present a finite difference algorithm to approximate the firm's value function and optimal exercise boundary. An important message in our paper is that the frequently applied quasi-analytical approach underestimates the impact of uncertainty. This is caused by the fact that the quasi-analytical solution does not satisfy the partial differential equation that governs the value function. As a result, the quasi-analytical approach may wrongly advise to invest in a substantial part of the state space.
Subjects: 
investment analysis
optimal stopping time problem
two-factor uncertainty
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article

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