Real Options in a Duopoly Market with General Volatility Structure

Masaaki Kijima and Takashi Shibata ()
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Masaaki Kijima: Graduate School of Social Sciences, Tokyo Metropolitan University, Japan

Chapter 4 in Recent Advances in Financial Engineering, 2009, pp 71-89 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper considers strategic entry decisions in a duopoly market when the underlying state variable follows a diffusion with volatility that depends on the current state variable. The extension to this case is more than marginal, since empirical studies have suggested that the volatility is indeed non-constant in real options practices. It is shown that, even in the extended model, three types of equilibria exist in the case of strategic substitution, as for the geometric Brownian case, when the revenue functions are linear. Also, the presence of strategic interactions may push a firm with cost advantage to invest earlier, and the firm value as well as the optimal threshold for the investment decision increases as the market uncertainty increases.

Keywords: Financial Engineering; Mathematical Finance; Real Options; Credit Risk; Option Pricing; Transaction Cost; Market Microstructure (search for similar items in EconPapers)
Date: 2009
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