Estimating State-Dependent Volatility of Investment Projects: A Simulation Approach

Pedro Godinho ()
Additional contact information
Pedro Godinho: Faculty of Economics, University of Coimbra and GEMF, Portugal

No 2015-02, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: Project volatility is an essential parameter for real options analysis, and it may also be useful for risk analysis. Many volatility estimation procedures only consider the volatility in the first year of the project. Others consider that different years may have different values of the project volatility. In this paper I show that volatility may change not only with time but also with the state of the project. I consider two possible definitions for the project volatility, the log-variance and the variance of the project value, and I propose three procedures for estimating state-dependent volatility: two-level simulation, one and a half level simulation and a regression procedure. Computational experiments show that the one and a half level simulation procedure and the regression procedure lead to the most accurate estimations of project volatility.

Keywords: Finance; Simulation; Project volatility; Real options; Investment analysis. (search for similar items in EconPapers)
JEL-codes: C15 G31 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2015-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.uc.pt/gmf/wpaper/wpgemf/gemf_2015-02.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:2015-02

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 ().