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A Model of Investment under Uncertainty with Time to Build, Market Incompleteness and Risk Aversion

Delaney, L. ORCID: 0000-0003-0944-9894 (2020). A Model of Investment under Uncertainty with Time to Build, Market Incompleteness and Risk Aversion (20/13). London, UK: Department of Economics, City, University of London.

Abstract

In this paper I develop a theoretical framework of irreversible investment under uncertainty in which there is time to build (TTB). The novel aspects of this framework, compared with TTB models in the extant literature, are that the market is incomplete in that not all the uncertainty associated with investing can be diversified away by trading an appropriate spanning asset, and the decision-maker, who acts in the interest of an organisation, is risk averse. I show that models of investment under uncertainty with a TTB, and models of investment under uncertainty with market incompleteness and risk aversion, ought not to be mutually exclusive as they have been in research to date because the recognised results of market incompleteness and risk aversion on the optimal investment strategy are challenged when we incorporate a TTB feature. Conversely, there are also implications on the effect of a TTB when we incorporate market incompleteness and risk aversion. The framework I develop in this paper provides a robust and parsimonious means of facilitating this.

Publication Type: Monograph (Discussion Paper)
Additional Information: Copyright 2020, the authors.
Publisher Keywords: Finance, Investment under Uncertainty, Time to Build, Market Incompleteness, Risk Aversion
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Departments: School of Arts & Social Sciences > Economics > Discussion Paper Series
Date Deposited: 28 Jul 2020 08:55
URI: https://openaccess.city.ac.uk/id/eprint/24613
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