Assessing Capital Investment Strategy under AmbiguityExport this event to calendar

Tuesday, March 1, 2016 — 4:00 PM to 5:00 PM EST

WatRISQ Seminar

Speaker:
Motoh Tsujimura
Associate Professor of Operations Research
Faculty of Commerce
Doshisha University, Japan

Topic:
“Assessing Capital Investment Strategy under Ambiguity”

Date:
Tuesday, March 1, 2016

Time:
4:00 p.m. 

Place:
Davis Centre, Room 1304, University of Waterloo


Abstract:

The uncertainty of the business environment is increasing more and more. Firms’ managers face complex business environments and the difficulty of predicting likely future outcomes. How they treat uncertainty is important in business decision making, such as investing in capital stock. In this paper, we consider a firm’s investment problem under uncertainty. In particular, we focus on a certain type of uncertainty to incorporate the unpredictable business environment. We consider the firm’s investment problem under ambiguity, which is also termed Knightian uncertainty. The probability of an outcome is not uniquely determined under ambiguity or Knightian uncertainty (Knight, 1921). 

Suppose that a firm produces a single output and sells it in a market. The firm’s problem is to decide the production capital investment rate to maximize its profit as in Abel and Eberly (1997). Investing in the capital requires a quadratic-type adjustment cost in addition to the purchase price, which is assumed to be constant. In this paper, we consider the case in which the firm’s manager cannot predict the future price of the output precisely. To be more precise, he cannot uniquely identify the probability distribution of the output price. Then, he has to determine the investment strategy under output price ambiguity. In Abel and Eberly (1997), the firm’s manager can uniquely identify the distribution of the output price. This paper is an extension of the research of Abel and Eberly (1997) by incorporating ambiguity. In order to reflect the misspecification of the model, we use robust control techniques developed by Hansen and Sargent (2001), Hansen et al. (2002), and Hansenet al. (2006). These techniques are based on the multiple priors framework by Gilboa and Schmeidler (1989). We formulate the firm’s problem as a robust control problem and show that the equation derives the optimal investment strategy. This research is based on joint work with Junich Imai.
WatRISQ Seminar by Professor Motoh Tsujimura of the University of Doshisha University, Japan

About the speaker

Motoh Tsujimura is Associate Professor of Operations Research in the Faculty of Commerce, Doshisha University, Japan. His research interests include real options, environmental policy under uncertainty, natural resource management problems under uncertainty and payout policy. Motoh Tsujimura has a PhD in Economics from Osaka University.


Faculty Host: Professor Ken Seng Tan, Department of Statistics and Actuarial Science, University of Waterloo

To find out more, contact the Waterloo Research Institute in Insurance, Securities and Quantitative Finance
University of Waterloo M3 4108 - (519) 888-4567 ext. 31043 – watrisq@uwaterloo.ca
 

Location 
DC - William G. Davis Computer Research Centre
Room 1304
200 University Avenue West

Waterloo, ON N2L 3G1
Canada

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