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A network of options: Evaluating complex interdependent decisions under uncertainty

  • Akamatsu, Takashi
  • Nagae, Takeshi
Registered author(s):

    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.

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    File URL: http://www.sciencedirect.com/science/article/B6V85-51XR3DH-1/2/609086f3cd814a29916aea83cfca1a67
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    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 35 (2011)
    Issue (Month): 5 (May)
    Pages: 714-729

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    Handle: RePEc:eee:dyncon:v:35:y:2011:i:5:p:714-729
    Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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