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Title: Pricing real options under the constant elasticity of variance diffusion
Authors: Dias, J. C.
Nunes, J. P.
Issue Date: 2011
Publisher: Wiley-Blackwell
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.
Description: WOS:000286492000002 (Nº de Acesso Web of Science)
Peer reviewed: Sim
DOI: 10.1002/fut.20468
ISSN: 0270-7314
Appears in Collections:BRU-RI - Artigo em revista científica internacional com arbitragem científica

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