A real options perspective on the future of the Euro

Fernando Alvarez and Avinash Dixit

Journal of Monetary Economics, 2014, vol. 61, issue C, 78-109

Abstract: A break-up of the Eurozone is no longer regarded as implausible. This will be a costly and irreversible decision in conditions of continuing uncertainty; therefore it is amenable to analysis in the real options framework. We do so by solving as an n-dimensional optimal stopping problem with country-specific shocks and “convergence” of member economies. We compare a complete break-up with individual country departures. In calibrated solutions for a symmetric case we find a non-negligible but small option value. Furthermore, we find a new theoretical result on the non-monotonicity of abandonment threshold with respect to volatility.

Keywords: Option value; Euro; Currency union; Break-up (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:61:y:2014:i:c:p:78-109

DOI: 10.1016/j.jmoneco.2013.11.007

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