Classic real options theory rests on two debatable assumptions: projects require a fixed investment and generate cash flows that follow a random walk. Relaxing both assumptions leads to radically different conclusions regarding the optimal timing of investment. We model investment using a...

Urban structures and urban growth rates are highly persistent. This has far-reaching implications for the optimal size and timing of new construction. We prove that rational developers postpone construction not because prospects are gloomy, but because they are bright. The slow mean reversion in...

This paper studies the aggregate implications of microeconomic investment irreversibility and idiosyncratic uncertainty in a simple growth model by highlighting real option effects. We endogenize the drift rate of real option by connecting it to the state of the economy. Thereby, we extend the...

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. The paper follows the real options approach, which allows to investigate the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and...

Many economic variables of interest exhibit a tendency to revert to predictable long-run levels. However, mean reverting processes are rarely used in investment models in the literature. In most models, geometric Brownian motion processes are used for tractability. In this paper, a firm's entry...

Several new models are used to eliminate lack of classic methods in valuation of investment decisions. Finding an answer for the question “which method is used to value investment” is important for investor to decide right investment. Choice of both methods and the components that are used...

The conventional wisdom that housing prices are the present value of future rents ignores the fact that unlike dividends on stocks, rent is not discretionary. Housing price uncertainty can affect household property investments, which in turn affect rent. By extending the theory of investment...

Employing a continuous-time real options modeling framework, this paper scrutinizes the incentives to invest in German offshore wind farms. The focus of the analysis is the mode of action of the German feed-in tariff system for offshore wind energy deployment. The numerical results reveal that...