Valuing an investment project using no-arbitrage and the alpha-maxmin criteria: from Knightian uncertainty to risk. (English) Zbl 1411.91486
Summary: We consider a two-period irreversible investment decision problem in which the firm can either invest in period 0 or in period 1. The firm is assumed to be able to specify a set of three scenarios or more but not a probability measure. Assuming the option to wait is valued with the no-arbitrage principle, when the firm makes use of the criteria \(\alpha\)-maxmin, we show the firm ends up with a known probability measure that assigns a positive probability to three or four scenarios only.
MSC:
| 91G10 | Portfolio theory |
Keywords:
Knightian uncertainty; investment decision; option to wait; no-arbitrage; \(\alpha\)-maxminReferences:
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