Real Options Valuation: The Importance of Stochastic Process Choice in Commodity Price Modelling

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Book Details

pages

114

published

2015

Format

PDF

Author

Max Schöne

Book : Real Options Valuation: The Importance of Stochastic Process Choice in Commodity Price Modelling

The Author shows that modelling the uncertain cash flow dynamics of an investment project deserves careful attention in real options valuation. Focusing on the case of commodity price uncertainty, a broad empirical study reveals that, contrary to common assumptions, prices are often non-stationary and exhibit non-normally distributed returns. Subsequently, more realistic stochastic volatility, jump diffusion, and Lévy processes are evaluated in the context of a stylised investment project. The valuation results suggest that stochastic process choice can have substantial implications for valuation results and optimal investment rules.

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