Real-option valuation in multiple dimensions using Poisson optional stopping times
View / Open Files
Publication Date
2020-03Journal Title
Journal of Financial and Quantitative Analysis
ISSN
0022-1090
Publisher
Cambridge University Press
Volume
55
Issue
2
Pages
653-677
Type
Article
This Version
AM
Metadata
Show full item recordCitation
Ralph, D., Lange, R., & Store, K. (2020). Real-option valuation in multiple dimensions using Poisson optional stopping times. Journal of Financial and Quantitative Analysis, 55 (2), 653-677. https://doi.org/10.1017/S0022109019000048
Abstract
We provide a new framework for valuing multidimensional real options where opportunities to exercise the option are generated by an exogenous Poisson process; this can be viewed as a liquidity constraint on decision times. This approach, which we call the Poisson optional stopping times (POST) method, finds the value function as a monotone sequence of lower bounds. In a case study, we demonstrate that the
frequently used quasi-analytic method yields a suboptimal policy and an inaccurate value function. The proposed method is demonstrably correct, straightforward to implement, reliable in computation and broadly applicable in analyzing multidimensional option-valuation problems.
Sponsorship
University of Cambridge Judge Business School small research grant 2016
Identifiers
External DOI: https://doi.org/10.1017/S0022109019000048
This record's URL: https://www.repository.cam.ac.uk/handle/1810/288343
Rights
Licence:
http://www.rioxx.net/licenses/all-rights-reserved
Statistics
Total file downloads (since January 2020). For more information on metrics see the
IRUS guide.