Schedule

• April 12th, 16h00
  BGSE Seminar Room
  Frank Riedel
  Paper discussed: Grenadier, S (2002): Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms
  
  Abstract: Under the standard real options approach to investment under uncertainty, agents formulate optimal exercise strategies in isolation and ignore competitive interactions. However, in many real-world asset markets, exercise strategies cannot be determined separately, but must be formed as part of a strategic equilibrium. This article provides a tractable approach for deriving equilibrium investment strategies in a continuous-time Cournot--Nash framework. The impact of competition on exercise strategies is dramatic. For example, while standard real options models emphasize that a valuable "option to wait" leads firms to invest only at large positive net present values, the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold. Copyright 2002, Oxford University Press.
  
  Paper available online


• April 26th, 16h00
  BGSE Seminar Room
  Xia Su
  

• May 10th, 16h00
  BGSE Seminar Room
  Marcelo Cadena
  Paper discussed: Sabarwal, T (2005): The Non-Neutrality of Debt in Investment Timing: A New NPV Rule
  
  Abstract: Limited liability debt financing of irreversible investments can affect investment timing through an entrepreneur’s option value, even after compensating a lender for expected default losses. This non-neutrality of debt arises from an entrepreneur’s unique investment opportunity, and it is shown in a standard model of irreversible investment that includes the equilibrium effect of a competitive lending sector. The analysis is partial, in that it takes as exogenously given an entrepreneur’s use of debt. Intuitively, limited liability lowers downside risk for the entrepreneur by truncating the lower tail of risks, and lowers the investment threshold. Compensating the lender for expected default losses reduces project profitability to the entrepreneur, and increases the investment threshold. The net effect is negative, because lower downside risk has an additional impact on the option value of delaying investment. The standard NPV rule in real options theory implicitly assumes debt to be neutral. With non-neutrality of debt, an investment threshold is higher than investment cost, but lower than the standard NPV rule. Comparisons with other standard investment thresholds show similar relationships.
  
  Paper available online


• May 24th, 16h00
  BGSE Seminar Room
  Monika Bier
  Paper discussed: Hugonnier, J & Morellec, E (2005): Real Options and Risk Aversion
  
  Abstract: In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or complete financial markets. Although these assumptions are crucial to the implications of the approach, they are not particularly relevant to most real-world environments where agents face incomplete markets are exposed to undiversifiable risks. In this paper we extend the real options approach to incorporate risk aversion for a general class of utility functions. We show that risk aversion provides an incentive for the investor to delay investment and leads to a significant erosion in project values.
  
  Paper available online


• June 28th, 16h00
  BGSE Seminar Room
  Frank Riedel
  Paper discussed: Dutta, P K & Rustichini, A (1993): A theory of stopping time games with applications to product innovations and asset sales
  
  Abstract: In this paper, the pure strategy subgame perfect equilibria of a general class of stopping time games are studied. It is shown that there always exists a natural class of Markov Perfect Equilibria, called stopping equilibria. Such equilibria can be computed as a solution of a single agent stopping time problem, rather than of a fixed point problem. A complete characterization of stopping equilibria is presented. Conditions are given under which the outcomes of such equilibria span the set of all possible outcomes from perfect equilibria. Two economic applications of the theory, product innovations and the timing of asset sales, are discussed.
  
  Paper available online


• August 16th, 16h00
  BGSE Seminar Room
  Monika Bier
  Paper discussed: Schied, A (2005): Optimal Investments for Robust Utility Functionals in Complete Market Models
  
  Abstract: We introduce a systematic approach to the problem of maximizing the robust utility of the terminal wealth of an admissible strategy in a general complete market model, where the robust utility functional is defined by a set Q of probability measures. Our main result shows that this problem can often be reduced to determining a "least favorable" measure q element of Q, which is universal in the sense that it does not depend on the particular utility function. The robust problem is thus equivalent to a standard utility maximization problem with respect to the "subjective" probability measure q. By using the Huber-Strassen theorem from robust statistics, it is shown that q always exists if Q is the sigma-core of a 2-alternating capacity. Besides other examples, we also discuss the problem of robust utility maximization with uncertain drift in a Black-Scholes market and the case of "weak information" as studied by Baudoin (2002).
  
  Paper available online


• August 30th, 16h00
  BGSE Seminar Room
  Monika Bier
  Paper discussed: Application of Schied, A (2005) to the problem of irreversible investments with binomial trees.
  

• September 6th, 16h00
  BGSE Seminar Room
  Frank Riedel
  Paper discussed: Optimal Stopping under Ambiguity I
  

• September 12th, 16h00
  BGSE Seminar Room
  Frank Riedel
  Paper discussed: Optimal Stopping under Ambiguity II
  

• October 2nd, 16h00
  BGSE Seminar Room
  Xia Su
  
  
• October 19th, 16h00
  BGSE Seminar Room
  Monika Bier
  Paper discussed: Epstein, LG & M. Schneider (2002): IID: Independently and Indistiguishably Distributed.
  
  Abstract: The inability of the Bayesian model to accomodate Ellsberg-type behavior is well known. This paper focuses on another limitation of the Bayesian model, specific to a dynamic setting, namely the inability to permit a distinction between experiments that are identical and those that are only indistinguishable. It is shown that such a distinction is afforded by recursive multiple-priors utility. Two related technical contributions are the proff of a strong LLN for recursive multiple-priors utility and the extension to sets of priors of the notion of regularity of a probability measure.
  
  Paper available online

• October 26th, 13h15
  BGSE Seminar Room
  David Schroeder
  

• November 2nd, 13h15
  BGSE Seminar Room
  Monika Bier
  The proof of Epstein, LG & M. Schneider (2002): IID: Independently and Indistiguishably Distributed.
  

• November 23th, 13h15
  BGSE Seminar Room
  Daniel Engelage
  Paper discussed: Maccheroni, F, M. Marinacci & A. Rustichini (2005): Dynamic variational preferences.
  
  Abstract: We introduce and axiomatize dynamic variational preferences, the dynamic version of the variational preferences we axiomatized in [F. Maccheroni, M. Marinacci, A. Rustichini, Ambiguity aversion, robustness, and the variational representation of preferences, Mimeo, 2004], which generalize the multiple priors preferences of Gilboa and Schmeidler [Maxmin expected utility with a non-unique prior, J. Math. Econ. 18 (1989) 141–153], and include the Multiplier Preferences inspired by robust control and first used in macroeconomics by Hansen and Sargent (see [L.P. Hansen, T.J. Sargent, Robust control and model uncertainty, Amer. Econ. Rev. 91 (2001) 60–66]), as well as the classic Mean Variance Preferences of Markovitz and Tobin. We provide a condition that makes dynamic variational preferences time consistent, and their representation recursive. This gives them the analytical tractability needed in macroeconomic and financial applications.A corollary of our results is that Multiplier Preferences are time consistent, but Mean Variance Preferences are not.
  
  Paper available online

• November 30th, 13h15
  BGSE Seminar Room
  Daniel Engelage
  Paper discussed: Maccheroni, F, M. Marinacci & A. Rustichini (2005): Dynamic variational preferences.
  

• December 7th, 13h15
  BGSE Seminar Room
  Daniel Engelage
  Paper discussed: Maccheroni, F, M. Marinacci & A. Rustichini (2005): Dynamic variational preferences.
  

• January 18th, 13h15
  BGSE Seminar Room
  David Schröder
  Paper discussed: Epstein, L. & Martin Schneider (2006): Learning under Ambiguity.
  
  Abstract: This paper considers learning when the distinction between risk and ambiguity matters. It first describes thought experiments, dynamic variants of those provided by Ellsberg, that highlight a sense in which the Bayesian learning model is extreme - it models agents who are implausibly ambitious about what they can learn in complicated environments. The paper then provides a generalization of the Bayesian model that accommodates the intuitive choices in the thought experiments. In particular, the model allows decision-makers’ confidence about the environment to change — along with beliefs — as they learn. A calibrated portfolio choice application shows how this property induces a trend towards more stock market participation and investment.
  
  Paper available online

• February 22nd, 13h15
  BGSE Seminar Room
  Lars Koch
  Paper discussed: Kalai, E & E. Lehrer (1993): Rational Learning Leads to Nash Equilibrium
  
  Abstract: Subjective utility maximizers, in an infinitely repeated game, will learn to predict opponents' future strategies and will converge to play according to a Nash equilibrium of the repeated game. Players' initial uncertainty is placed directly on opponents' strategies and the above result is obtained under the assumption that the individual beliefs are compatible with the chosen strategies. An immediate corollary is that, when playing a Harsanyi-Nash equilibrium of a repeated game of incomplete information about opponents' payoff matrices, players will eventually play a Nash equilibrium of the real game, as if they had complete information.
  
  Paper available online

• March 1st, 13h15
  BGSE Seminar Room
  Marcelo Cadena
  Topic: Venture capital in the presence of irreversibility
  

• March 8th, 13h15
  BGSE Seminar Room
  Frank Riedel