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Article: The effect of uncertainty on investment timing in a real options model

TitleThe effect of uncertainty on investment timing in a real options model
Authors
KeywordsInvestment timing
Real options
Uncertainty
Issue Date2007
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jedc
Citation
Journal Of Economic Dynamics And Control, 2007, v. 31 n. 7, p. 2152-2167 How to Cite?
AbstractThis paper examines the effect of uncertainty on investment timing in a canonical real options model. We show that the critical value of a project that triggers the exercise of the investment option exhibits a U-shaped pattern against the volatility of the project. This is due to the two countervailing risk and return factors in effect. We further show that such a U-shaped pattern is inherited by the expected time to exercise the investment option. Thus, for relatively safe projects, greater uncertainty shortens the expected exercise time and thus enhances investment. This is in sharp contrast to the negative investment-uncertainty relationship commonly found in the extant literature. Finally, we show that the positive investment-uncertainty relationship is more likely for high growth projects than for low growth projects. © 2006 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/85675
ISSN
2015 Impact Factor: 0.879
2015 SCImago Journal Rankings: 0.937
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2010-09-06T09:07:53Z-
dc.date.available2010-09-06T09:07:53Z-
dc.date.issued2007en_HK
dc.identifier.citationJournal Of Economic Dynamics And Control, 2007, v. 31 n. 7, p. 2152-2167en_HK
dc.identifier.issn0165-1889en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85675-
dc.description.abstractThis paper examines the effect of uncertainty on investment timing in a canonical real options model. We show that the critical value of a project that triggers the exercise of the investment option exhibits a U-shaped pattern against the volatility of the project. This is due to the two countervailing risk and return factors in effect. We further show that such a U-shaped pattern is inherited by the expected time to exercise the investment option. Thus, for relatively safe projects, greater uncertainty shortens the expected exercise time and thus enhances investment. This is in sharp contrast to the negative investment-uncertainty relationship commonly found in the extant literature. Finally, we show that the positive investment-uncertainty relationship is more likely for high growth projects than for low growth projects. © 2006 Elsevier B.V. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jedcen_HK
dc.relation.ispartofJournal of Economic Dynamics and Controlen_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.rightsNOTICE: this is the author’s version of a work that was accepted for publication in <Journal of Economic Dynamics and Control>. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in PUBLICATION, [VOL 31, ISSUE 7, (2007)] DOI 10.1016/j.jedc.2006.07.002-
dc.subjectInvestment timingen_HK
dc.subjectReal optionsen_HK
dc.subjectUncertaintyen_HK
dc.titleThe effect of uncertainty on investment timing in a real options modelen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0165-1889&volume=31&issue=7&spage=2152&epage=2167&date=2007&atitle=The+effect+of+uncertainty+on+investment+timing+in+a+real+options+modelen_HK
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturepostprint-
dc.identifier.doi10.1016/j.jedc.2006.07.002en_HK
dc.identifier.scopuseid_2-s2.0-34248636540en_HK
dc.identifier.hkuros134727en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-34248636540&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume31en_HK
dc.identifier.issue7en_HK
dc.identifier.spage2152en_HK
dc.identifier.epage2167en_HK
dc.identifier.isiWOS:000247747100002-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK
dc.identifier.citeulike2080996-

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