REAL OPTIONS VOLATILITY ESTIMATION WITH CORRELATED INPUTS |
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Authors: | Barry R Cobb John M Charnes |
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Institution: | The University of Kansas, School of Business , Lawrence, Kansas, USA |
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Abstract: | Real Options Analysis (ROA) provides a framework for valuing reactive and proactive managerial flexibility in investment decisions. Estimating the volatility parameter for a real options model is challenging because there are typically no historical returns for the underlying asset and no current market prices. A previously developed method of using simulation to estimate the volatility parameter for a real investment is demonstrated. The effects of serial price correlation and price-demand cross-correlation on volatility parameters developed with this method are explained. Finally, managerial implications of these findings are discussed. |
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