Huang, Bing and Cao, Jiling and Chung, Hyuck (2013): Strategic real options with stochastic volatility in a duopoly model.
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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.
Item Type: | MPRA Paper |
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Original Title: | Strategic real options with stochastic volatility in a duopoly model |
English Title: | Strategic real options with stochastic volatility in a duopoly model |
Language: | English |
Keywords: | Asymptotic solution, Real option, Stochastic duopoly game, Stochastic volatility. |
Subjects: | C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games |
Item ID: | 45731 |
Depositing User: | Jiling Cao |
Date Deposited: | 02 Apr 2013 09:50 |
Last Modified: | 10 Oct 2019 13:05 |
References: | [1] Brennan, M.J., Schwartz, E.S., 1985. Evaluating natural resource investments. Journal of Business 58, 135-157. [2] Dixit, A.K., Pindyck, R.S., 1994. Investment under uncertainty. Princeton University Press, New Jersey. [3] Graham, J., 2011. Strategic real options under asymmetric information. Journal of Economic Dynamics and Control 35, 922-934. [4] Heston, S.L., 1993. A closed-form solution for options with stochastic volatility with applications to bond and currency options. The Review of Financial Studies 6, 327-343. [5] Hsu, Y.W., Lambrecht, B.M., 2007. Preemptive patenting under uncertainty and asymmetric information. Annals of Operations Research 151, 5-28. [6] Marseguerra, G., Cortelezzi, F., Dominioni, A., 2006. Investment timing decisions in a stochastic duopoly model. Chaos, Solitons and Fractals 29, 611-625. [7] McDonald, R., Siegel, D., 1986. The value of waiting to invest. The Quarterly Journal of Economics 101, 707-728. [8] Fouque, J.P., Papanicolaou, G., Sircar, K.R., 2000. Derivatives in Financial Markets with Stochastic Volatility. Cambridge University Press. [9] Ting, S.H.M., Ewald, C., Wang, W., 2011. On the investment-uncertainty relationship in a real option model with stochastic volatility. SSRN working paper No.1846396. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/45731 |