We investigate the implications of technological innovation and non-diversifiable risk on entrepreneurial entry and optimal portfolio choice. In a real options model where two risk-averse individuals strategically decide on technology adoption, we show that the impact of non-diversifiable risk...

This paper is an introduction to the concepts and methods used in the field of real options as they relate to investments. The analog between financial and real options is explained. The discrete version of a model is introduced, then solutions to the canonical model in continuous time using...

This paper extends real options theory to consider the situation where the mean appreciation rate of the value of an irreversible investment project is not observable and governed by an Ornstein-Uhlenbeck process. Our main purpose is to analyze the impact of the uncertainty of the mean...

This paper extends the Goetzmann, Ingersoll, and Ross (2003) model to the case of partial information, where the expected return of a hedge fund is not observable but known to be either high or low. The fund manager can dynamically update his belief about the true value of the expected return...

We analyze how the presence of financial markets effects the optimal exercise of real options for a risk averse agent. In this process we examine the role of the minimal martingale measure and the Capital Asset Pricing Model (CAPM). Using value-matching and smooth-pasting conditions, we...

If agents in workhorse business cycle models with financial frictions are allowed to index contracts to observable aggregates, they share aggregate financial risk (almost) perfectly. Thus, the borrowing-constrained capital holders' wealth share does not collapse following adverse shocks and the...

Recent empirical evidence suggests that US industrial firms invest heavily in noncash, risky financial assets. Using hand-collected data on financial portfolios of German firms, we show that risky asset holdings are not an anomaly unique to the US. We find that industrial firms in Germany invest...

An entrepreneur faces non-diversifiable business risk and liquidity constraints. We provide a unified framework that embeds these frictions to study interdependent business start-up/entry, capital accumulation/asset sales, portfolio allocation, consumption/saving, and business exit decisions....

We develop a tractable continuous-time consumption-savings model for a liquidity-constrained agent who faces both permanent and transitory income shocks under incomplete markets. We derive an explicitly-solved consumption function and show that the marginal (certainty equivalent) value of...

This paper studies the investment timing problem of an entrepreneur with a non- tradable real option with undiversifiable risk. We find that the time preference can have a significant impact on the risk attitude toward the idiosyncratic risk, which re- sults from the wealth effect on the implied...