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Optimal stopping made easy

  • Svetlana Boyarchenko

    (The University of Texas at Austin)

  • Sergey Levendorskiy

    (The University of Texas at Austin)

This paper presents a simple discrete time model for valuing real options. A short proof of optimal exercise rules for the standard problems in the real options theory is given in the binomial and trinomial models, and more generally, when the underlying uncertainty is modelled as a random walk on a lattice. The method of the paper is based on the use of the expected present value operators. With straightforward modifications, the method works in discrete time--continuous space, continuous time--continuous space and continuous time--discrete space models.

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File URL: http://econwpa.repec.org/eps/fin/papers/0410/0410016.pdf
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Paper provided by EconWPA in its series Finance with number 0410016.

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Date of creation: 26 Oct 2004
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Handle: RePEc:wpa:wuwpfi:0410016
Note: Type of Document - pdf
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  1. Svetlana Boyarchenko, 2004. "Irreversible Decisions and Record-Setting News Principles," American Economic Review, American Economic Association, vol. 94(3), pages 557-568, June.
  2. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  3. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  4. 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.
  5. 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.
  6. Svetlana Boyarchenko & Sergei Levendorskii, 2004. "Real options and the universal bad news principle," Levine's Bibliography 122247000000000430, UCLA Department of Economics.
  7. Svetlana Boyarchenko & Sergei Levendorskii, 2005. "General option exercise rules, with applications to embedded options and monopolistic expansion," Finance 0511001, EconWPA.
  8. Bianca Hilberink & L.C.G. Rogers, 2002. "Optimal capital structure and endogenous default," Finance and Stochastics, Springer, vol. 6(2), pages 237-263.
  9. Svetlana Boyarchenko & Sergei Levendorskii, 2004. "Practical guide to real options in discrete time," Finance 0405016, EconWPA.
  10. Svetlana Boyarchenko & Sergei Levendorskii, 2005. "American options: the EPV pricing model," Annals of Finance, Springer, vol. 1(3), pages 267-292, 08.
  11. S. I. Boyarchenko & S. Z. Levendorskii, 2002. "Pricing of perpetual Bermudan options," Quantitative Finance, Taylor & Francis Journals, vol. 2(6), pages 432-442.
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