IDEAS home Printed from https://ideas.repec.org/a/eee/apmaco/v265y2015icp120-132.html
   My bibliography  Save this article

Path integration for real options

Author

Listed:
  • Grillo, Sebastian
  • Blanco, Gerardo
  • Schaerer, Christian E.

Abstract

Real options were firstly formulated by using traditional financial option models; however, an investor can confront in practice with exotic dynamics. Nowadays, approaches based on simulations have been gaining relevance for solving complex options. This paper proposes the application of the path integral approach (PI) to multivariate real option problems. We discuss the viability of the proposal by a mathematical analysis of the problem and an application to a case study of control chart decision (CCD). The proposal is compared with the traditional approaches for solving real option problems. The results present the proposal as a competitive alternative for the simulation in low dimensional problems.

Suggested Citation

  • Grillo, Sebastian & Blanco, Gerardo & Schaerer, Christian E., 2015. "Path integration for real options," Applied Mathematics and Computation, Elsevier, vol. 265(C), pages 120-132.
    • Handle: RePEc:eee:apmaco:v:265:y:2015:i:c:p:120-132
    DOI: 10.1016/j.amc.2015.04.111
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0096300315005731
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.amc.2015.04.111?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    2. Montagna, Guido & Nicrosini, Oreste & Moreni, Nicola, 2002. "A path integral way to option pricing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 310(3), pages 450-466.
    3. Boyle, Phelim P., 1988. "A Lattice Framework for Option Pricing with Two State Variables," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(1), pages 1-12, March.
    4. D. Lemmens & M. Wouters & J. Tempere & S. Foulon, 2008. "A path integral approach to closed-form option pricing formulas with applications to stochastic volatility and interest rate models," Papers 0806.0932, arXiv.org.
    5. G. Montagna & O. Nicrosini & N. Moreni, 2002. "A Path Integral Way to Option Pricing," Papers cond-mat/0202143, arXiv.org.
    6. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    7. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
    8. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    9. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhang, Mingming & Zhou, Dequn & Zhou, Peng, 2014. "A real option model for renewable energy policy evaluation with application to solar PV power generation in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 944-955.
    2. Carlos Andrés Zapata Quimbayo, 2020. "OPCIONES REALES Una guía teórico-práctica para la valoración de inversiones bajo incertidumbre mediante modelos en tiempo discreto y simulación de Monte Carlo," Books, Universidad Externado de Colombia, Facultad de Finanzas, Gobierno y Relaciones Internacionales, number 138, September.
    3. Seiji Harikae & James S. Dyer & Tianyang Wang, 2021. "Valuing Real Options in the Volatile Real World," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 171-189, January.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    5. Lukito Adi Nugroho, 2017. "Real options valuation of franchise territorial exclusivity," Cogent Business & Management, Taylor & Francis Journals, vol. 4(1), pages 1262490-126, January.
    6. Chung-Gee Lin & Yu-Shan Wang, 2012. "Evaluating natural resource projects with embedded options and limited reserves," Applied Economics, Taylor & Francis Journals, vol. 44(12), pages 1471-1482, April.
    7. Manuel Moreno & Javier Navas, 2003. "On the Robustness of Least-Squares Monte Carlo (LSM) for Pricing American Derivatives," Review of Derivatives Research, Springer, vol. 6(2), pages 107-128, May.
    8. Lars Stentoft, 2013. "American option pricing using simulation with an application to the GARCH model," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 5, pages 114-147, Edward Elgar Publishing.
    9. Yuh‐Dauh Lyuu & Yu‐Quan Zhang, 2023. "Pricing multiasset time‐varying double‐barrier options with time‐dependent parameters," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(3), pages 404-434, March.
    10. Leif Andersen & Mark Broadie, 2004. "Primal-Dual Simulation Algorithm for Pricing Multidimensional American Options," Management Science, INFORMS, vol. 50(9), pages 1222-1234, September.
    11. Savolainen, Jyrki, 2016. "Real options in metal mining project valuation: Review of literature," Resources Policy, Elsevier, vol. 50(C), pages 49-65.
    12. Sebastian Maier, 2021. "Re-evaluating natural resource investments under uncertainty: An alternative to limited traditional approaches," Annals of Operations Research, Springer, vol. 299(1), pages 907-937, April.
    13. Andrea Gamba & Lenos Trigeorgis, 2007. "An Improved Binomial Lattice Method for Multi-Dimensional Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(5), pages 453-475.
    14. Yen Thuan Trinh & Bernard Hanzon, 2022. "Option Pricing and CVA Calculations using the Monte Carlo-Tree (MC-Tree) Method," Papers 2202.00785, arXiv.org.
    15. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    16. Joseph Y. J. Chow & Amelia C. Regan, 2011. "Real Option Pricing of Network Design Investments," Transportation Science, INFORMS, vol. 45(1), pages 50-63, February.
    17. In oon Kim & Bong-Gyu Jang & Kyeong Tae Kim, 2013. "A simple iterative method for the valuation of American options," Quantitative Finance, Taylor & Francis Journals, vol. 13(6), pages 885-895, May.
    18. Lars Stentoft, 2004. "Convergence of the Least Squares Monte Carlo Approach to American Option Valuation," Management Science, INFORMS, vol. 50(9), pages 1193-1203, September.
    19. Carmen Schiel & Simon Glöser-Chahoud & Frank Schultmann, 2019. "A real option application for emission control measures," Journal of Business Economics, Springer, vol. 89(3), pages 291-325, April.
    20. Capuozzo, Pietro & Panella, Emanuele & Schettini Gherardini, Tancredi & Vvedensky, Dimitri D., 2021. "Path integral Monte Carlo method for option pricing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 581(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:apmaco:v:265:y:2015:i:c:p:120-132. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/applied-mathematics-and-computation .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.