A network of options: Evaluating complex interdependent decisions under uncertainty
The present article provides a novel framework for analyzing option network problems, which is a general class of compound real option problems with an arbitrary combination of reversible and irreversible decisions. The present framework represents the interdependent structure of decisions by using a directed graph. In this framework, the option network problem is formulated as a singular stochastic control problem, whose optimality condition is then obtained as a dynamical system of generalized linear complementarity problems (GLCPs). This enables us to develop a systematic and efficient numerical method for evaluating the option value and the optimal decision policy.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Bar-Ilan, Avner & Sulem, Agnes & Zanello, Alessandro, 2002. "Time-to-build and capacity choice," Journal of Economic Dynamics and Control, Elsevier, vol. 26(1), pages 69-98, January.
- Majd, Saman & Pindyck, Robert S., 1987.
"Time to build, option value, and investment decisions,"
Journal of Financial Economics,
Elsevier, vol. 18(1), pages 7-27, March.
- Saman Majd & Robert S. Pindyck, 1985. "Time to Build, Option Value, and Investment Decisions," NBER Working Papers 1654, National Bureau of Economic Research, Inc.
- Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
- Stulz, ReneM., 1982. "Options on the minimum or the maximum of two risky assets : Analysis and applications," Journal of Financial Economics, Elsevier, vol. 10(2), pages 161-185, July.
- Carr, Peter P, 1988. " The Valuation of Sequential Exchange Opportunities," Journal of Finance, American Finance Association, vol. 43(5), pages 1235-1256, December.
- Trigeorgis, Lenos, 1993. "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 1-20, March.
- Robert C. Merton, 1973.
"Theory of Rational Option Pricing,"
Bell Journal of Economics,
The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-622, June.
- Mark Broadie & Jerome B. Detemple, 2004. "ANNIVERSARY ARTICLE: Option Pricing: Valuation Models and Applications," Management Science, INFORMS, vol. 50(9), pages 1145-1177, September.
- Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
- Dixit, Avinash K, 1989.
"Entry and Exit Decisions under Uncertainty,"
Journal of Political Economy,
University of Chicago Press, vol. 97(3), pages 620-638, June.
- He, Hua & Pindyck, Robert S., 1992.
"Investments in flexible production capacity,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 16(3-4), pages 575-599.
- Robert S. Pindyck, 1986.
"Irreversible Investment, Capacity Choice, and the Value of the Firm,"
NBER Working Papers
1980, National Bureau of Economic Research, Inc.
- Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
- Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Nagae, Takeshi & Akamatsu, Takashi, 2008. "A generalized complementarity approach to solving real option problems," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1754-1779, June.
- Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
- Brennan, Michael J & Schwartz, Eduardo S, 1977. "The Valuation of American Put Options," Journal of Finance, American Finance Association, vol. 32(2), pages 449-462, May.
- Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
- Triantis, Alexander J & Hodder, James E, 1990. " Valuing Flexibility as a Complex Option," Journal of Finance, American Finance Association, vol. 45(2), pages 549-565, June.
- Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
- Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-514, June.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
- McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-349, June.
- James E. Smith & Detlof von Winterfeldt, 2004. "Anniversary Article: Decision Analysis in Management Science," Management Science, INFORMS, vol. 50(5), pages 561-574, May.
- Trigeorgis, Lenos, 1991. "A Log-Transformed Binomial Numerical Analysis Method for Valuing Complex Multi-Option Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 309-326, September.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:35:y:2011:i:5:p:714-729. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
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.