Implementing Real Options Valuation under Macroeconomic Risk and Normally Distributed Cash Flows

Norvald Instefjord () and Turalay Kenc ()
Additional contact information
Norvald Instefjord: Redear of Finance, Essex Business School, Essex University, Wivenhoe Park, Colchester CO43SQ, England
Turalay Kenc: INCEIF University, Jalan Tun Ismail, Kuala Lumpur, 50480 Kuala Lumpur, Wilayah Persekutuan Kuala Lumpur, Malaysia

International Econometric Review (IER), 2024, vol. 16, issue 1, 50-67

Abstract: The paper highlights the encountered problems in implementing real options under more realistic assumptions such as business cycle risk and normally distributed cash flows. The problems considered include (i) estimating empirical distribution of cash flows from real option investments; (ii) investment decisions across business cycles, and (iii) calculating the probability of investing with the above stated rich features. To this end, we estimate operating cash flows of US corporate firms using a Markov chain model under both geometric and arithmetic Brownian motions assumptions for cash flows and develop a valuation model of real option with normally distributed cash flows. Associated investment valuation models incorporating these estimates reveal that critical cash flow levels significantly differ across models and regimes.

Keywords: Macroeconomic Risk; Regime Switching; Real Options; Arithmetic Brownian Motion; Geometric Brownian Motion (search for similar items in EconPapers)
JEL-codes: D92 E22 E32 G31 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://dergipark.org.tr/tr/download/article-file/3897646 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:erh:journl:v:16:y:2024:i:1:p:50-67

Access Statistics for this article

International Econometric Review (IER) is currently edited by Asad Zaman

More articles in International Econometric Review (IER) from Econometric Research Association Contact information at EDIRC.
Bibliographic data for series maintained by M. F. Cosar ().