Driffill, John and Kenc, T. and Sola, Martin (2013) Real options with priced regime-switching risk. International Journal of Theoretical and Applied Finance 16 , p. 1350028. ISSN 0219-0249.
This is the latest version of this item.
Abstract
We develop a model of regime-switching risk premia as well as regime-dependent 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: | Article |
|---|---|
| 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 |
| Research Centres and Institutes: | Applied Macroeconomics, Birkbeck Centre for |
| Depositing User: | Administrator |
| Date Deposited: | 22 Jul 2013 08:53 |
| Last Modified: | 02 Aug 2023 17:06 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/7756 |
Available Versions of this Item
-
Real options with priced regime-switching risk. (deposited 21 Jun 2013 06:38)
- Real options with priced regime-switching risk. (deposited 22 Jul 2013 08:53) [Currently Displayed]
Statistics
Additional statistics are available via IRStats2.
Archive Staff Only (login required)
