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Publication Detailed Description
Journal Title
Journal of Futures Markets
Year (definitive publication)
2011
Language
English
Country
United States of America
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Abstract
Much of the work on real options assumes that the underlying state variable follows a geometric Brownian motion with constant volatility. This paper uses a more general assumption for the state variable process that better captures the empirical regularities found in commodity markets. We use the constant elasticity of variance diffusion, where volatility is a function of underlying asset prices, and we provide analytic solutions for perpetual American options. We show that a firm that uses the standard lognormal assumption is exposed to significant errors of analysis, which may lead to nonoptimal investment and disinvestment decisions.
Acknowledgements
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Keywords
Fields of Science and Technology Classification
- Economics and Business - Social Sciences
Contributions to the Sustainable Development Goals of the United Nations
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