Real-Option Valuation in Multiple Dimensions Using Poisson Optional Stopping Times

Rutger-Jan Lange, Daniel Ralph and Kristian Støre

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 2, 653-677

Abstract: We provide a new framework for valuing multidimensional real options where opportunities to exercise the option are generated by an exogenous Poisson process, which can be viewed as a liquidity constraint on decision times. This approach, which we call the Poisson optional stopping times (POST) method, finds the value function as a monotone sequence of lower bounds. In a case study, we demonstrate that the frequently used quasi-analytic method yields a suboptimal policy and an inaccurate value function. The proposed method is demonstrably correct, straightforward to implement, reliable in computation, and broadly applicable in analyzing multidimensional option-valuation problems.

Date: 2020
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