Real options, risk aversion and markets: A corporate finance perspective

Ewald, C. O. and Taub, B. (2022) Real options, risk aversion and markets: A corporate finance perspective. Journal of Corporate Finance, 72, 102164. (doi: 10.1016/j.jcorpfin.2022.102164)

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We analyze how the presence of financial markets affects the optimal exercise of real options for a risk averse agent. Extending the results of Shackleton and Sodal (2005), we characterize the optimal exercise rule in terms of a benchmark portfolio, even for the case of an incomplete market, facilitating the minimal martingale measure. We unambiguously characterize the effect of idiosyncratic risk on the speed of exercise of the option. We further show that systematic risk can accelerate execution and reduce the value of a call-type option, in contrast with the standard view that both value and execution threshold are increasing in volatility.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Taub, Professor Bart and Ewald, Professor Christian
Authors: Ewald, C. O., and Taub, B.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Corporate Finance
ISSN (Online):1872-6313
Published Online:10 February 2022
Copyright Holders:Copyright © 2022 The Authors
First Published:First published in Journal of Corporate Finance 72: 102164
Publisher Policy:Reproduced under a Creative Commons licence

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