Calibration of a basket option model applied to company valuation

Stefan Wörner, Boryana Racheva-Iotova and Stoyan Stoyanov

Mathematical Methods of Operations Research, 2002, vol. 55, issue 2, 247-263

Abstract: Applying real options thinking to company valuation seems theoretically and intuitively appealing. However, the real option analogy of a single European option as well as the compound option proxy perform poorly when applied to company valuation. We therefore suggest to rework the building blocks of real option applications to corporate valuation. We introduce a framework to delineate the distribution of the underlying asset in the risk neutral world, which is important in order to value any derivative. This is achieved by an algorithm to calibrate a basket option model using real world data of observed share prices. The fitting takes account of the class of stable distributions. The index of stability of asymmetric α stable distribution serves as an over-all parameter to characterise the specific distribution. Copyright Springer-Verlag Berlin Heidelberg 2002

Keywords: Key words: real options; basket options; valuation; stable distributions (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:spr:mathme:v:55:y:2002:i:2:p:247-263

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DOI: 10.1007/s001860200184

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