IDEAS home Printed from https://ideas.repec.org/p/hal/journl/halshs-00003976.html
   My bibliography  Save this paper

The real option with an absorbing barrier

Author

Listed:
  • Minh Ha-Duong

    (EPP - Department of Engineering and Public Policy, Carnegie Mellon University - CMU - Carnegie Mellon University [Pittsburgh], CIRED - centre international de recherche sur l'environnement et le développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique)

  • Benoit Morel

    (EPP - Department of Engineering and Public Policy, Carnegie Mellon University - CMU - Carnegie Mellon University [Pittsburgh])

Abstract

This paper analyzes the theoretical problem of the real option with barrier. It models an investment decision with a double irreversibility concern: investing is irreversible, but waiting runs the risk of loosing the opportunity to invest. The optimal strategy leads to earlier investment when the barrier increases, or when uncertainty decreases. Uncertainty has ambiguous effects on the expected decision time and on the investment probability after N years. Analytical and numerical results also apply to the perpetual American call with a down-and-out barrier on a dividend paying asset.

Suggested Citation

  • Minh Ha-Duong & Benoit Morel, 2003. "The real option with an absorbing barrier," Post-Print halshs-00003976, HAL.
    • Handle: RePEc:hal:journl:halshs-00003976
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00003976v1
    as

    Download full text from publisher

    File URL: https://shs.hal.science/halshs-00003976v1/document
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ha-Duong, Minh, 1998. "Quasi-option value and climate policy choices," Energy Economics, Elsevier, vol. 20(5-6), pages 599-620, December.
    2. Gao, Bin & Huang, Jing-zhi & Subrahmanyam, Marti, 2000. "The valuation of American barrier options using the decomposition technique," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1783-1827, October.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. William A. Brock & Michael Rothschild & Joseph E. Stiglitz, 1989. "Stochastic Capital Theory," Palgrave Macmillan Books, in: George R. Feiwel (ed.), Joan Robinson and Modern Economic Theory, chapter 20, pages 591-622, Palgrave Macmillan.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Paul Magis & Alessandro Sbuelz, 2006. "The Value Of Fighting Irreversible Demise By Softening The Irreversible Cost," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 503-516.
    2. Magis, P. & Sbuelz, A., 2005. "The Value of Fighting Irreversible Demise by Softening the Irreversible Cost," Other publications TiSEM d1ee4831-05b4-4d1f-a02e-6, Tilburg University, School of Economics and Management.
    3. Magis, P. & Sbuelz, A., 2005. "The Value of Fighting Irreversible Demise by Softening the Irreversible Cost," Discussion Paper 2005-26, Tilburg University, Center for Economic Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.
    2. Meyer, Elisabeth & Rees, Ray, 2012. "Watchfully waiting: Medical intervention as an optimal investment decision," Journal of Health Economics, Elsevier, vol. 31(2), pages 349-358.
    3. Linda Fernandez & Larry Karp, 1998. "Restoring Wetlands Through Wetlands Mitigation Banks," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 12(3), pages 323-344, October.
    4. Marc Baudry, 2000. "Joint Management of Emission Abatement and Technological Innovation for Stock Externalities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 16(2), pages 161-183, June.
    5. Davis, Graham A. & Cairns, Robert D., 2012. "Good timing: The economics of optimal stopping," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 255-265.
    6. Graeme Guthrie, 2021. "Discounting, Disagreement, and the Option to Delay," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(1), pages 95-133, September.
    7. Henri de Groot, 2001. "On the optimal timing of reductions of CO2 emissions; an economists' perspective on the debate on "when flexibility"," CPB Discussion Paper 1.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Ben Abdallah, Skander & Lasserre, Pierre, 2016. "Asset retirement with infinitely repeated alternative replacements: Harvest age and species choice in forestry," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 144-164.
    9. Oscar Gutiérrez & Francisco Ruiz-Aliseda, 2011. "Real options with unknown-date events," Annals of Finance, Springer, vol. 7(2), pages 171-198, May.
    10. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    11. Arve, Malin & Zwart, Gijsbert, 2023. "Optimal procurement and investment in new technologies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    12. Shively, Gerald E., 2001. "Price thresholds, price volatility, and the private costs of investment in a developing country grain market," Economic Modelling, Elsevier, vol. 18(3), pages 399-414, August.
    13. Marks, Phillipa & Marks, Brian, 2007. "Spectrum Allocation, Spectrum Commons and Public Goods: the Role of the Market," MPRA Paper 6785, University Library of Munich, Germany.
    14. Stern, Nicholas, 2018. "Public economics as if time matters: Climate change and the dynamics of policy," Journal of Public Economics, Elsevier, vol. 162(C), pages 4-17.
    15. Krause, M.U., 2002. "Inter-Industry Wage Differentials and Job Flows," Discussion Paper 2002-3, Tilburg University, Center for Economic Research.
    16. Wong, Kit Pong & Yi, Long, 2013. "Irreversibility, mean reversion, and investment timing," Economic Modelling, Elsevier, vol. 30(C), pages 770-775.
    17. Pierre‐Richard Agénor, 2004. "Macroeconomic Adjustment and the Poor: Analytical Issues and Cross‐Country Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 351-408, July.
    18. Atal, Vidya & Bar, Talia & Gordon, Sidartha, 2016. "Project selection: Commitment and competition," Games and Economic Behavior, Elsevier, vol. 96(C), pages 30-48.
    19. Yonggu Kim & Keeyoung Shin & Joseph Ahn & Eul-Bum Lee, 2017. "Probabilistic Cash Flow-Based Optimal Investment Timing Using Two-Color Rainbow Options Valuation for Economic Sustainability Appraisement," Sustainability, MDPI, vol. 9(10), pages 1-16, October.
    20. Bergendahl, Goran, 2005. "Models for investment in electronic commerce--financial perspectives with empirical evidence," Omega, Elsevier, vol. 33(4), pages 363-376, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-00003976. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.