Comments on the Investment-Uncertainty Relationship in a Real Option Model
Date
01.01.2001
01.01.2001
Authors
Michele Moretto, Nunzio Cappuccio
JEL Code
C6,E2
C6,E2
Keywords:
Investment,uncertainty,real options
Investment,uncertainty,real options
Publisher
Economy and Society
Economy and Society
Editor
Fausto Panunzi
Fausto Panunzi
The paper considers the problem of evaluating the probability of investing in a capital-investment project as a measure of the uncertainty-investment relationship in a real option model. By the use of the contingent claims analysis the opportunity to invest is modelled as an American call option with expiring time. We show that an increase in uncertainty of the project may actually have positive or negative effects on the probability of investing depending on which market parameters are called to restore the asset price equilibrium condition.