Investment Analysis Under Uncertainty

Modern investment theory comprises baseline model of investment, theory model and two important extensions of model: uncertainty and financial market imperfections. This paper aims at analyzing the role of uncertainty on investment by using the theory of stochastic dynamic optimization. In this paper, we focus on four types of uncertainty: demand,interest rate,price and environment.It is well known that in the baseline model firms face a perfectly elastic supply of capital goods and can adjust their capital stocks costlessly. It is a natural one to consider, but we can see that this model is not enough for us to know about the actual investment. theory solves the difficulties. In the analysis of influence of interest rate on investment decisions, this paper improves the Calcanini's model. Considering the adjustment costs, the optimal rate of investment is gotten which is not found in Calcanini's model.Many production processes damage the environment and this subject of increasing concern in the world today. An important question in this respect is what kind of policy instruments the government, in its role as social planner, should choose to reduce the level of pollution. This paper studies optimal investment policies for a polluting firm in an uncertain environment. This paper expends Kort's model theoretically. The final conclusions are important for the government to constitute the standard of controlling pollution.Application of the stochastic calculus to problems in economics and finance raises several modeling issues. McShane's canonical model and alternative stochastic calculus for handling these models resolves these issues in a satisfactory manner. This paper explores the application of McShane's approach to project investment with real option methods.