Investment under Ambiguity and Regime-Switching Environment

Abstract

We consider all or nothing investment problem with a finite time horizon when the investment opportunity set is changing stochastically over time, especially under Markovian regime-switching environment, and a decision maker faces ambiguity of parameters governing pro t ow dynamics of the investment. We apply a-Maxmin Expected Utility(a-MEU) preferences to reect the ambiguity seeking attitude of de- cision maker and provide semi-explicit formulas for the expected value of investment and the critical present value of the profit fow. Numerical results show that the crit- ical present value of the profit fow depends on the business cycle and the tendency of ambiguity seeking is mitigated in case of project whose profit fow is dependent on regime-switching environment.