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Response to Comments on Brandão et al. (2005)

Author

Listed:
  • Luiz E. Brandão

    (IAG Business School, Pontifícia Universidade Católica do Rio de Janeiro, Rio de Janeiro, RJ 22453-900, Brazil)

  • James S. Dyer

    (McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712)

  • Warren J. Hahn

    (McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712)

Abstract

In this note, we respond to Smith’s (2005) discussion of the approach outlined in our paper (Brandão et al. 2005) on using traditional decision analysis methods to solve real-options problems. Our response addresses several areas where we largely agree with Smith, but have different views on modeling preferences or on the practicality of implementing alternative modeling approaches. We view the issue raised by Smith on the estimation of process volatility to be a valid concern and propose a modification to our method to address this problem.

Suggested Citation

  • Luiz E. Brandão & James S. Dyer & Warren J. Hahn, 2005. "Response to Comments on Brandão et al. (2005)," Decision Analysis, INFORMS, vol. 2(2), pages 103-109, June.
    • Handle: RePEc:inm:ordeca:v:2:y:2005:i:2:p:103-109
    DOI: 10.1287/deca.1050.0042
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    References listed on IDEAS

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    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. Alexander Triantis, 2005. "Realizing the Potential of Real Options: Does Theory Meet Practice?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 8-16, March.
    3. Luiz E. Brandão & James S. Dyer & Warren J. Hahn, 2005. "Using Binomial Decision Trees to Solve Real-Option Valuation Problems," Decision Analysis, INFORMS, vol. 2(2), pages 69-88, June.
    4. Ibáñez, Alfredo & Zapatero, Fernando, 2004. "Monte Carlo Valuation of American Options through Computation of the Optimal Exercise Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 253-275, June.
    5. Adam Borison, 2005. "Real Options Analysis: Where Are the Emperor's Clothes?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 17-31, March.
    6. James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
    7. D. P. de Farias & B. Van Roy, 2003. "The Linear Programming Approach to Approximate Dynamic Programming," Operations Research, INFORMS, vol. 51(6), pages 850-865, December.
    8. James E. Smith, 2005. "Alternative Approaches for Solving Real-Options Problems," Decision Analysis, INFORMS, vol. 2(2), pages 89-102, June.
    9. Thomas E. Copeland & Vladimir Antikarov, 2005. "Real Options: Meeting the Georgetown Challange," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 32-51, March.
    10. 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.
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    Cited by:

    1. Tianyang Wang & James S. Dyer, 2012. "A Copulas-Based Approach to Modeling Dependence in Decision Trees," Operations Research, INFORMS, vol. 60(1), pages 225-242, February.
    2. Tianyang Wang & James S. Dyer, 2010. "Valuing Multifactor Real Options Using an Implied Binomial Tree," Decision Analysis, INFORMS, vol. 7(2), pages 185-195, June.
    3. Warren J. Hahn & James S. Dyer, 2011. "A Discrete Time Approach for Modeling Two-Factor Mean-Reverting Stochastic Processes," Decision Analysis, INFORMS, vol. 8(3), pages 220-232, September.
    4. Carol Alexander & Xi Chen, 2021. "Model risk in real option valuation," Annals of Operations Research, Springer, vol. 299(1), pages 1025-1056, April.
    5. L. Robin Keller, 2011. "From the Editor ---Multiattribute and Intertemporal Preferences, Probability, and Stochastic Processes: Models and Assessment," Decision Analysis, INFORMS, vol. 8(3), pages 165-169, September.
    6. L. Robin Keller & Kelly M. Kophazi, 2010. "From the Editors..," Decision Analysis, INFORMS, vol. 7(2), pages 151-154, June.

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