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Journal of Financial and Quantitative Analysis Vol. 55 No. 2 2020

Real-Option Valuation in Multiple Dimensions Using Poisson Optional Stopping Times

Rutger-Jan Lange1,2,3,4; Daniel Ralph1,2,3,4; Kristian Støre1,2,3,4

1 University of Cambridge · 2 Nord University · 3 Cambridge School · 4 Erasmus University Rotterdam

open access

Abstract

We provide a new framework for valuing multidimensional real options where opportunities to exercise the option are generated by an exogenous Poisson process, which can be viewed as a liquidity constraint on decision times. This approach, which we call the Poisson optional stopping times (POST) method, finds the value function as a monotone sequence of lower bounds. In a case study, we demonstrate that the frequently used quasi-analytic method yields a suboptimal policy and an inaccurate value function. The proposed method is demonstrably correct, straightforward to implement, reliable in computation, and broadly applicable in analyzing multidimensional option-valuation problems.

DOI
10.1017/s0022109019000048
Volume
55
Issue
2
Pages
653-677
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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