The impacts of uncertainties in a real options model under incomplete information

This paper examines the impact with respect to the uncertainty of the underlying state variable, profit uncertainty, on the real options model in a situation of incomplete information. Profit uncertainty has not incorporated into the real options model under incomplete information, in that the under...

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Bibliographic Details
Published inEuropean journal of operational research Vol. 187; no. 3; pp. 1368 - 1379
Main Author Shibata, Takashi
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 16.06.2008
Elsevier
Elsevier Sequoia S.A
SeriesEuropean Journal of Operational Research
Subjects
Decision analysis
Finance
Impact analysis
Incomplete information theory
Kalman filtering
Real options analysis
Real options valuation methods
Stochastic models
Studies
Uncertainty
Incomplete information theory
Real options valuation methods
Kalman filtering
Decision analysis
Finance
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Summary:This paper examines the impact with respect to the uncertainty of the underlying state variable, profit uncertainty, on the real options model in a situation of incomplete information. Profit uncertainty has not incorporated into the real options model under incomplete information, in that the underlying state variable is not formulated as the stochastic process (see, e.g., Bernardo, A. E., Chowdhry, E. B., 2002. Resources, real options, and corporate strategy. Journal of Financial Economics, 63, 211–234). We extend the model developed by Bernardo and Chowdhry to formulate the underlying state variable as the stochastic process. We conclude that profit uncertainty has the same type of impact on the real options value and its triggers, both under complete and incomplete information.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2006.09.019