Investment decisions under incomplete markets in the presence of wealth effects

Niu, Y; Yang, J; Zou, Z

Investment decisions under incomplete markets in the presence of wealth effects

Niu, Y Yang, J Zou, Z

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Publisher:: Springer Science and Business Media LLC
Publication Type:: Journal Article
Citation:: Journal of Economics/ Zeitschrift fur Nationalokonomie, 2021, 133, (2), pp. 167-189
Issue Date:: 2021-07-01

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Field	Value	Language
dc.contributor.author	Niu, Y
dc.contributor.author	Yang, J
dc.contributor.author	Zou, Z
dc.date.accessioned	2022-07-02T21:43:40Z
dc.date.available	2022-07-02T21:43:40Z
dc.date.issued	2021-07-01
dc.identifier.citation	Journal of Economics/ Zeitschrift fur Nationalokonomie, 2021, 133, (2), pp. 167-189
dc.identifier.issn	0931-8658
dc.identifier.issn	1617-7134
dc.identifier.uri	http://hdl.handle.net/10453/158535
dc.description.abstract	This paper investigates the impact of market incompleteness on investment decisions. In contrast to previous studies, we assume an entrepreneur has power utility and investment causes an additive increase in her wealth. By using the binomial theorem, we derive the analytical solutions for the option value and investment threshold. First, we show that an increase in wealth alleviates the over-investment problem caused by the market incompleteness. In addition, the marginal value of wealth is always more than one and decreases in the wealth level. Finally, the increase in wealth substantially enhances the value of the investment option and lowers the idiosyncratic risk premium.
dc.language	en
dc.publisher	Springer Science and Business Media LLC
dc.relation.ispartof	Journal of Economics/ Zeitschrift fur Nationalokonomie
dc.relation.isbasedon	10.1007/s00712-021-00731-1
dc.rights	info:eu-repo/semantics/closedAccess
dc.subject	14 Economics
dc.subject.classification	Economics
dc.title	Investment decisions under incomplete markets in the presence of wealth effects
dc.type	Journal Article
utslib.citation.volume	133
utslib.for	14 Economics
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/DVC (International)
utslib.copyright.status	closed_access	*
dc.date.updated	2022-07-02T21:43:39Z
pubs.issue	2
pubs.publication-status	Published
pubs.volume	133
utslib.citation.issue	2

Abstract:

This paper investigates the impact of market incompleteness on investment decisions. In contrast to previous studies, we assume an entrepreneur has power utility and investment causes an additive increase in her wealth. By using the binomial theorem, we derive the analytical solutions for the option value and investment threshold. First, we show that an increase in wealth alleviates the over-investment problem caused by the market incompleteness. In addition, the marginal value of wealth is always more than one and decreases in the wealth level. Finally, the increase in wealth substantially enhances the value of the investment option and lowers the idiosyncratic risk premium.

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http://hdl.handle.net/10453/158535