Investment under Uncertainty

A full analysis of optimal fisheries investment strategies must take into account high levels of uncertainty in future fishery returns, as well as irreversibility of investment in specialized, nonmalleable fishing fleets. A stochastic optimization model is analyzed using dynamic programming to determine optimal policy functions for both fleet investment and fish stock management within an uncertain environment. The resulting policies are qualitatively similar to those found in the corresponding deterministic case, but quantitative differences can be substantial. Simulation results show that optimal fleet capacity should be expected to fluctuate over a fairly wide range, induced by stochastic variations in the biomass. However, the performance of a linear-cost risk-neutral fishery is fairly insensitive to variations in investment and escapement policies around their optimum levels, so that economic optimization is "forgiving" within this context. A framework of balancing upside and downside investment risks is used here to explain the roles of several fishery parameters in relation to optimal investment under uncertainty. In particular, the intrinsic growth rate of the resource and the ratio of unit capital costs to unit operating costs are found to be key parameters in determining whether investment should be higher or lower under uncertainty.

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Does the Market Correctly Value Investment Options?*

Review of Finance ◽

10.1093/rof/rfaa002 ◽

2020 ◽

Vol 24 (6) ◽

pp. 1159-1201

Author(s):

Evgeny Lyandres ◽

Egor Matveyev ◽

Alexei Zhdanov

Keyword(s):

Stock Market ◽

Real Options ◽

Equity Markets ◽

Optimal Investment ◽

Investment Under Uncertainty ◽

Innovative Firms ◽

Public Equity

Abstract This paper shows that the stock market misprices firms’ investment options. We build a real options model of optimal investment under uncertainty to estimate the value of firms’ investment options. We show that firms with valuable investment options have a higher likelihood of being mispriced. Importantly, this mispricing is not one-sided, as such firms are equally likely to be undervalued or overvalued. Our paper adds to the debate on whether public equity markets are myopic and systematically undervalue innovative firms. We show that this is not necessarily the case.

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