A network of options: Evaluating complex interdependent decisions under uncertainty

Takashi Akamatsu and Takeshi Nagae

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 5, 714-729

Abstract: The present article provides a novel framework for analyzing option network problems, which is a general class of compound real option problems with an arbitrary combination of reversible and irreversible decisions. The present framework represents the interdependent structure of decisions by using a directed graph. In this framework, the option network problem is formulated as a singular stochastic control problem, whose optimality condition is then obtained as a dynamical system of generalized linear complementarity problems (GLCPs). This enables us to develop a systematic and efficient numerical method for evaluating the option value and the optimal decision policy.

Keywords: Compound; real; options; Managerial; flexibility; Graph; theory; Singular; stochastic; control; problems; Generalized; complementarity; problems (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:5:p:714-729

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