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[00964] The Valuation of Real Options for Risky Barrier to Entry with Hybrid Stochastic and Local Volatility and Stochastic Investment Costs

  • Session Time & Room : 4E (Aug.24, 17:40-19:20) @D505
  • Type : Contributed Talk
  • Abstract : Real options are sorts of investment choices which support agents in making better decisions in management strategic cases as well as reducing uncertainty in investment simultaneously. In this paper, we present the new model for investors to handle uncertain environments in investment flexibly: First, we adopt a hybrid stochastic and local volatility model to efficiently describe the external uncertain environment affecting the value of the project in decision making cases, and we set up the investment cost as geometric Brownian motion to illustrate the value of the opportunity costs which arise from things given up by choosing to invest in complex decision making circumstances. We derive partial differential equations for the value of real options and then use asymptotic analysis to obtain analytical solutions for that of the real options. In addition, we analyze the price accuracy of the approximated formulas compared to the solutions obtained from Monte-Carlo simulation. Finally, we investigate the effects of various parameters related to stochastic volatility on real options numerically to observe economic implications.
  • Classification : 91G20
  • Format : Talk at Waseda University
  • Author(s) :
    • Donghyun Kim (Pusan National University)
    • Yong Hyun Shin (Sookmyung Women's University)
    • Ji-Hun Yoon (Pusan National University)