Hostname: page-component-77c89778f8-swr86 Total loading time: 0 Render date: 2024-07-17T15:43:49.009Z Has data issue: false hasContentIssue false
  • English
  • Français

Optimal hitting time and perpetual option in a non-Lévy model: application to real options

Part of: Stochastic processes Special processes

Published online by Cambridge University Press:  01 July 2016

P. Barrieu  and
N. Bellamy
P. Barrieu*
Affiliation:
London School of Economics
N. Bellamy*
Affiliation:
Université d'Evry Val d'Essonne
*
∗ Postal address: Department of Statistics, London School of Economics, Houghton Street, London WC2A 2AE, UK. Email address: p.m.barrieu@lse.ac.uk
∗∗ Postal address: Equipe d'Analyse et Probabilités, Université d'Evry Val d'Essonne, Rue du Père Jarlan, 91025 Evry Cedex, France. Email address: nadine.bellamy@univ-evry.fr
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We study the perpetual American option characteristics in the case where the underlying dynamics involve a Brownian motion and a point process with a stochastic intensity. No assumption on the distribution of the jump size is made and we work with an arbitrary positive or negative jump. After proving the existence of an optimal stopping time for the problem and characterizing it as the hitting time of an optimal boundary, we provide closed-form formulae for the option value, as well as for the Laplace transform of the optimal stopping time. These results are then applied to the analysis of a real option problem when considering the impact of a fundamental and brutal change in the investment project environment. The consequences of this impact, that can seriously modify, positively or negatively, the project's future cash flows and therefore the investment decision, are illustrated by numerical examples.

Keywords

Optimal stopping timeperpetual American optionpoint processreal option

MSC classification

Primary: 60G40: Stopping times; optimal stopping problems; gambling theory 60G55: Point processes
Secondary: 60K99: None of the above, but in this section
Type
General Applied Probability
Information
Advances in Applied Probability , Volume 39 , Issue 2 , June 2007 , pp. 510 - 530
Copyright
Copyright © Applied Probability Trust 2007 

References

Barrieu, P. and Bellamy, N. (2005). Impact of market crises on real options. In Exotic Option Pricing under Advanced Lévy Models, eds Kyprianou, A., Schoutens, W. and Wilmott, P., John Wiley, New York, pp. 149–168.Google Scholar
Brennan, M. J. and Schwartz, E. S. (1985). Evaluating natural resource investments. J. Business 58, 135–157.CrossRefGoogle Scholar
Chesney, M. and Jeanblanc, M. (2004). Pricing American currency options in an exponential Lévy model. Appl. Math. Finance 11, 207–225.CrossRefGoogle Scholar
Dixit, A. K. and Pindyck, R. S. (1993). Investment under Uncertainty. Princeton University Press.Google Scholar
El Karoui, N. (1981). Les aspects probabilistes du contrôle stochastique. In Ecole d'Eté de Probabilités de Saint Flour IX—1979 (Lecture Notes Math. 876), Springer, New York, pp. 73–238.Google Scholar
Gerber, H. U. and Shiu, E. S. W. (1998). Pricing perpetual options for Jump processes. N. Amer. Actuarial J.. 2, 101–112.CrossRefGoogle Scholar
Jacka, S. D. (1991). Optimal stopping and the American put. Math. Finance 1, 1–14.CrossRefGoogle Scholar
Karatzas, I. and Shreve, S. E. (1998). Methods of Mathematical Finance. Springer, New York.Google Scholar
McDonald, R. and Siegel, D. (1986). The value of waiting to invest. Quart. J. Econom. 101, 707–727.CrossRefGoogle Scholar
Merton, R. C. (1992). Continuous-Time Finance. Blackwell, Cambridge.Google Scholar
Mordecki, E. (2002). Optimal stopping and perpetual options for Lévy processes. Finance Stoch. 6, 473–493.CrossRefGoogle Scholar
Muroi, Y. (2002). Pricing American put options on defaultable bonds. Asia–Pacific Financial Markets 9, 217–239.CrossRefGoogle Scholar
Peskir, G. and Shiryaev, A. N. (2006). Optimal Stopping and Free-Boundary Problems. Birkhäuser, Basel.Google Scholar