Strategic real options with stochastic volatility in a duopoly model
AbstractThe investment-timing problem has been considered by many authors under the assumption that the instantaneous volatility of the demand shock is constant. Recently, Ting et al.  carried out an asymptotic approach in a monopoly model by letting the volatility parameter follow a stochastic process. In this paper, we consider a strategic game in which two firms compete for a new market under an uncertain demand, and extend the analysis of Ting et al. to duopoly models under different strategic game structures. In particular, we investigate how the additional uncertainty in the volatility affects the investment thresholds and payoffs of players. Several numerical examples and comparison of the results are provided to confirm our analysis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 45731.
Date of creation: 18 Mar 2013
Date of revision:
Asymptotic solution; Real option; Stochastic duopoly game; Stochastic volatility.;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-06 (All new papers)
- NEP-BEC-2013-04-06 (Business Economics)
- NEP-COM-2013-04-06 (Industrial Competition)
- NEP-ORE-2013-04-06 (Operations Research)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
- Ting, Sai Hung Marten & Ewald, Christian-Oliver & Wang, Wen-Kai, 2013. "On the investment–uncertainty relationship in a real option model with stochastic volatility," Mathematical Social Sciences, Elsevier, vol. 66(1), pages 22-32.
- Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Graham, Jeffrey, 2011. "Strategic real options under asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 922-934, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.