TY: JOUR
T1 - Pricing real options under the constant elasticity of variance diffusion
A1 - Dias, J. C.
A1 - Nunes, J. P.
N2 - 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.
UR - https://repositorio.iscte-iul.pt/handle/10071/9166
Y1 - 2011
PB - Wiley-Blackwell