Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82028
Authors: 
Lund, Diderik
Year of Publication: 
2003
Series/Report no.: 
EPRU Working Paper Series 2003-17
Abstract: 
The real options tradition originally predicted a decreasing relationship between uncertainty and investment, through the positive effect of higher uncertainty on the trigger level for revenue relative to costs. An opposing effect on the probability of reaching the level has been identified, yielding a total effect with ambiguous sign. This paper makes three points. The “opposing” effect is not always opposing. Systematic risk cannot generally be assumed to increase with volatility. A probability is not the best measure of investment. The sign of the total effect is again ambiguous. This ambiguity is illustrated, depending on specification of model and parameters.
Subjects: 
investment
uncertainty
real options
stochastic control
JEL: 
C61
D92
E22
G31
Document Type: 
Working Paper

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