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Pricing war within a real option framework

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  • Vincent Medina
  • Cyr-Denis Nidier

Abstract

The aim of this paper is to provide insights on war spending using simple tools of financial calculus rather than developing a general theory. Combining Grossman and Han's theory of war finance with the empirical literature that displays a straightforward relationship between the real value of money and wartime military events, we advocate the use of the real option approach of war spending. Some calculations and an empirical example illustrate this approach.

Suggested Citation

  • Vincent Medina & Cyr-Denis Nidier, 2003. "Pricing war within a real option framework," Defence and Peace Economics, Taylor & Francis Journals, vol. 14(6), pages 425-435.
  • Handle: RePEc:taf:defpea:v:14:y:2003:i:6:p:425-435
    DOI: 10.1080/1024269032000085198
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    References listed on IDEAS

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    1. Bruno S. Frey & Marcel Kucher, 1999. "Wars and Markets: How Bond Values Reflect World War II," CESifo Working Paper Series 221, CESifo Group Munich.
    2. Hirshleifer, Jack, 1995. "Theorizing about conflict," Handbook of Defense Economics,in: Keith Hartley & Todd Sandler (ed.), Handbook of Defense Economics, edition 1, volume 1, chapter 7, pages 165-189 Elsevier.
    3. Hall, George J., 2004. "Exchange rates and casualties during the first world war," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1711-1742, November.
    4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    5. Willard, Kristen L & Guinnane, Timothy W & Rosen, Harvey S, 1996. "Turning Points in the Civil War: Views from the Greenback Market," American Economic Review, American Economic Association, vol. 86(4), pages 1001-1018, September.
    6. Brown, William O. & Burdekin, Richard C. K., 2000. "Turning Points in the U.S. Civil War: A British Perspective," The Journal of Economic History, Cambridge University Press, vol. 60(01), pages 216-231, March.
    7. Herschel I. Grossman & Taejoon Han, 1991. "A Theory of War Finance," NBER Working Papers 3799, National Bureau of Economic Research, Inc.
    8. Calomiris, Charles W, 1994. "Price and Exchange Rate Determination during the Greenback Suspension," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 344-344, April.
    9. Rockoff, Hugh, 1998. "The Peace Dividend in Historical Perspective," American Economic Review, American Economic Association, vol. 88(2), pages 46-50, May.
    10. Richard C.K. Burdekin & Marc D. Weidenmier, "undated". "The Option Value of Confederate Currency and Inflation Control, 1861-1865," Claremont Colleges Working Papers 2000-29, Claremont Colleges.
    11. Grossman, Herschel I & Han, Taejoon, 1996. "War Debt, Moral Hazard, and the Financing of the Confederacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 200-215, May.
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    Keywords

    War; Options; Financial Calculus;

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