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The impact of stochastic properties of traffic demand on real option value in road projects

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Abstract

In this paper we examine the stochastic properties that long term aggregate traffic demand exhibits. Based on the results of the time series analysis, we examine how fractionally integrated processes affect real option valuation in road projects. We conclude that the long memory property we find in long term aggregate traffic demand using Swedish data, implying that a shock in demand has persistent positive effects on future demand, leads to higher option values in road projects compared to the values from a standard model using geometric Brownian motion.

Suggested Citation

  • Krüger, Niclas, 2012. "The impact of stochastic properties of traffic demand on real option value in road projects," Working papers in Transport Economics 2012:17, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
    • Handle: RePEc:hhs:ctswps:2012_017
    Note: Real option analysis; Fractional Brownian motion; Monte Carlo simulation
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    File URL: http://www.transportportal.se/SWoPEc/CTS2012-17.pdf
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    References listed on IDEAS

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    1. Flyvbjerg,Bent & Bruzelius,Nils & Rothengatter,Werner, 2003. "Megaprojects and Risk," Cambridge Books, Cambridge University Press, number 9780521009461, November.
    2. Saphores, Jean-Daniel M. & Boarnet, Marlon G., 2006. "Uncertainty and the timing of an urban congestion relief investment.: The no-land case," Journal of Urban Economics, Elsevier, vol. 59(2), pages 189-208, March.
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    More about this item

    Keywords

    Real option analysis; Fractional Brownian motion; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

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