Article2004

REAL OPTIONS VOLATILITY ESTIMATION WITH CORRELATED INPUTS

47 citations0/0 files storedThe Engineering Economist

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Capital Investment and Risk Analysis Stochastic processes and financial applications Financial Reporting and Valuation Research

Abstract

Real Options Analysis (ROA) provides a framework for valuing reactive and proactive managerial flexibility in investment decisions. Estimating the volatility parameter for a real options model is challenging because there are typically no historical returns for the underlying asset and no current market prices. A previously developed method of using simulation to estimate the volatility parameter for a real investment is demonstrated. The effects of serial price correlation and price-demand cross-correlation on volatility parameters developed with this method are explained. Finally, managerial implications of these findings are discussed.

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References

1973The Pricing of Options and Corporate Liabilities 1973Theory of Rational Option Pricing 2005Theory of rational option pricing 1979Option pricing: A simplified approach 1976The valuation of options for alternative stochastic processes 1996Real Options: Managerial Flexibility and Strategy in Resource Allocation 1996Real options: Managerial flexibility and strategy in resource allocation 1999Real options: managing strategic investment in an uncertain world

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