Monte Carlo Estimation of Project Volatility for Real Options Analysis

Pedro Godinho (pgodinho@fe.uc.pt)

No 2006-01, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: Volatility is a fundamental parameter for option valuation. In particular, real options models require project volatility, which is very hard to estimate accurately because there is usually no historical data for the underlying asset. Several authors have used a method based on Monte Carlo simulation for estimating project volatility. In this paper we analyse the existing procedures for applying the method, concluding that they will lead to an upward bias in the volatility estimate. We propose different procedures that will provide better results, and we also discuss the business consequences of using upwardly biased volatility estimates in real options analysis.

Pages: 34 pages
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published in Journal of Applied Finance 16(1): 15-30, 2006.

Downloads: (external link)
https://estudogeral.uc.pt/bitstream/10316/11754/1/ ... ect%20Volatility.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gmf:wpaper:2006-01

Access Statistics for this paper

More papers in GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra Contact information at EDIRC.
Bibliographic data for series maintained by Sofia Antunes (ceber@uc.pt).