Path integration for real options

Sebastian Grillo, Gerardo Blanco and Christian E. Schaerer

Applied Mathematics and Computation, 2015, vol. 265, issue C, 120-132

Abstract: Real options were firstly formulated by using traditional financial option models; however, an investor can confront in practice with exotic dynamics. Nowadays, approaches based on simulations have been gaining relevance for solving complex options. This paper proposes the application of the path integral approach (PI) to multivariate real option problems. We discuss the viability of the proposal by a mathematical analysis of the problem and an application to a case study of control chart decision (CCD). The proposal is compared with the traditional approaches for solving real option problems. The results present the proposal as a competitive alternative for the simulation in low dimensional problems.

Keywords: Real option; Path integration; Markov process; Continuous state; European option; American option (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:265:y:2015:i:c:p:120-132

DOI: 10.1016/j.amc.2015.04.111

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