Strategic real options with stochastic volatility in a duopoly model

Bing Huang, Jiling Cao and Hyuck Chung

MPRA Paper from University Library of Munich, Germany

Abstract: The investment-timing problem has been considered by many authors under the assumption that the instantaneous volatility of the demand shock is constant. Recently, Ting et al. [9] carried out an asymptotic approach in a monopoly model by letting the volatility parameter follow a stochastic process. In this paper, we consider a strategic game in which two firms compete for a new market under an uncertain demand, and extend the analysis of Ting et al. to duopoly models under different strategic game structures. In particular, we investigate how the additional uncertainty in the volatility affects the investment thresholds and payoffs of players. Several numerical examples and comparison of the results are provided to confirm our analysis.

Keywords: Asymptotic solution; Real option; Stochastic duopoly game; Stochastic volatility. (search for similar items in EconPapers)
JEL-codes: C61 C73 (search for similar items in EconPapers)
Date: 2013-03-18
New Economics Papers: this item is included in nep-bec, nep-com and nep-ore
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Related works:
Journal Article: Strategic real options with stochastic volatility in a duopoly model (2014)
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