Driffill, John and Kenc, T. and Sola, Martin (2009) Real options with priced regime-switching risk. Working Paper. Universidad Torcuato Di Tuella, Buenos Aires, Argentina.
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Abstract
We develop a model of regime-switching risk premia as well as regimedependent factor risk premia to price real options. The model incorporates the observation that the underlying risky income streams of real options are subject to discrete shifts over time as well as random changes. The presence of discrete shifts is due to systematic and unsystematic risk associated with changes in business cycles or in economic policy regimes or events such as takeovers, major changes in business plans. We analyze the impact of regime switching behavior on the valuation of projects and investment opportunities. We find that accounting for Markov switching risk results in a delay in the expected timing of the investment while the regime-specific factor risk premia make the possibility of a regime shift more pronounced.
Metadata
| Item Type: | Monograph (Working Paper) |
|---|---|
| Keyword(s) / Subject(s): | Regime-Switching Risk Premia, Regime-Dependent Risk Premia, Real Options |
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Martin Sola |
| Date Deposited: | 21 Jun 2013 06:38 |
| Last Modified: | 15 Apr 2025 13:06 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/7497 |
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