Mathematics and Financial Economics

, Volume 7, Issue 4, pp 509–530 | Cite as

Optimal investment with two-factor uncertainty

  • Manuel J. Rocha Armada
  • Paulo J. Pereira
  • Artur Rodrigues


This paper presents a real options model to value the option to invest in a project contingent on two stochastic factors. A general sensitivity analysis is conducted highlighting the importance of the variance and correlation between the two variables. A higher correlation is shown to increase always the values of the trigger, the active project and the option. The impact of uncertainty is more complex and depends on the assumption about which variables adjust and the correlation between the variables and the market.


Multiple stochastic factors Uncertainty Real options 

JEL Classification:

D81 G31 



We would like thank two anonymous referees, and also Dean Paxson, Helena Pinto, Nelson Areal, Ana Carvalho and anonymous participants on the 10th Annual Real Options Conference for helpful comments. All remaining errors are the sole responsibility of the authors. We acknowledge the support of the Portuguese Foundation for Science and Technology—Project PTDC/GES/78033/2006.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  • Manuel J. Rocha Armada
    • 1
  • Paulo J. Pereira
    • 2
  • Artur Rodrigues
    • 1
  1. 1.NIPE, University of MinhoBragaPortugal
  2. 2.CEF.UP, Faculdade de Economia, Universidade do PortoPortoPortugal

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