PMA license valuation: A Bayesian learning real options approach
This paper develops a Bayesian learning real option (BLRO) by merging the Bayesian decision-making process with the real options framework. The BLRO approach is then used to value a parts manufacturing approval (PMA) license for an aerospace firm in the maintenance, repair, and overhaul industry. The model combines statistical decision theory with options pricing to evaluate strategic capital expenditures assuming a decision time horizon and posturing costs. Real option attributes are discussed in a decision analytic context and thresholds are identified for improved decision-making. In contrast to other models in the real options literature in which new information is passively introduced during the delay period, our approach encourages active information acquisition and quantifies its impact on the decision.
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.
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.:
- Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
- Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
- Sundaresan, S.M., 2000. "Continuous-Time Methods in Finance: A Review and an Assessment," Papers 00-03, Columbia - Graduate School of Business.
- Merton, Robert C., 1987.
"A simple model of capital market equilibrium with incomplete information,"
1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
- James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
- James C. Van Horne, 1969. "The Analysis of Uncertainty Resolution in Capital Budgeting for new Products," Management Science, INFORMS, vol. 15(8), pages B376-B386, April.
- Constantinides, George M, 1978. "Market Risk Adjustment in Project Valuation," Journal of Finance, American Finance Association, vol. 33(2), pages 603-16, May.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Trigeorgis, Lenos, 1996. "Evaluating leases with complex operating options," European Journal of Operational Research, Elsevier, vol. 91(2), pages 315-329, June.
- Harold Bierman, Jr. & Warren H. Hausman, 1972. "The Resolution of Investment Uncertainty Through Time," Management Science, INFORMS, vol. 18(12), pages B654-B662, August.
- Paddock, James L & Siegel, Daniel R & Smith, James L, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 479-508, August.
- Smidt, Seymour, 1979. "A Bayesian Analysis of Project Selection and of Post Audit Evaluations," Journal of Finance, American Finance Association, vol. 34(3), pages 675-88, June.
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
When requesting a correction, please mention this item's handle: RePEc:eee:revfin:v:19:y:2010:i:1:p:28-37. 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: (Zhang, Lei)
If references are entirely missing, you can add them using this form.