This study investigates irreversible investment decisions when the exercise payoff is scale-dependent; thus, it is endogenously determined by the firm's risk management. We find that the scale-dependency gives rise to a speculative risk management strategy: a positive relationship between the...

This paper studies a model of irreversible investment decisions in which the exercise payoff is endogenously determined by the firm's risk management choice. By obtaining the explicit solution of a non-linear free boundary problem with a stochastic control, we present the implications for the...

Anderson (1976) was the first to give a non-standard construction of a Brownian motion. His approach was to use the binomial model in a discrete time with infinitesimal time steps. Pricing an option in a model similar to the Black-Scholes model with the nonstandard Brownian motion can be done by...

We propose a model of hedging and investment with ambiguity aversion in an incomplete financial market. We show that the agent's worst-case belief depends upon the payoff of the derivative to be hedged. Thus, we identify situations where one can distinguish ambiguity averse agents from...

We present an approach for pricing American put options with a regime-switching volatility. Our method reveals that the option price can be expressed as the sum of two components: the price of a European put option and the premium associated with the early exercise privilege. Our analysis...