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Valuing an investment project using no-arbitrage and the alpha-maxmin criteria: From Knightian uncertainty to risk

Abstract : 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 α-maxmin, we show the firm ends up with a known probability measure that assigns a positive probability to three or four scenarios only.
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yann Braouezec, Robert Joliet. Valuing an investment project using no-arbitrage and the alpha-maxmin criteria: From Knightian uncertainty to risk. Economics Letters, Elsevier, 2019, 178, pp.111-115. ⟨10.1016/j.econlet.2019.03.007⟩. ⟨hal-02504260⟩

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