We study a stochastic version of Fudenberg–Tirole's preemption game. Two firms contemplate entering a new market with stochastic demand. Firms differ in sunk costs of entry. If the demand process has no upward jumps, the low cost firm enters first, and the high cost firm follows. If leader's...

We introduce stochastic income into the standard exponential discounting model and study dependence of effective discount rates on the type of the underlying stochastic process and agent's current income level. If the income follows a process with i.i.d. increments effective discounting is...

We give short proofs of general theorems about optimal entry and exit problems in Levy models, when payoff streams may have discontinuities and be non-monotone. As applications, we consider exit and entry problems in the theory of real options, and an entry problem with an embedded option to exit.

An ambiguity averse decision-maker contemplates investment of a fixed size capital into a project with a stochastic profit stream under the Knightian uncertainty. Multiple priors are modeled as a ``cloud" of diffusion processes with embedded compound Poisson jumps. The ``cloud" contains the...

We study a stochastic version of Fudenberg--Tirole's preemption game. Two firms contemplate entering a new market with stochastic demand. Firms differ in sunk costs of entry. If the demand process has no upward jumps, the low cost firm enters first, and the high cost firm follows. If leader's...

The goal of the paper is to study how a menu of options affects decisions of a rational agent facing uncertainty over future payoff streams. Using the real options approach, we demonstrate that multiple options not only increase the barrier which the underlying stochastic variable has to reach...

This paper presents a simple discrete time model for valuing real options. A short proof of optimal exercise rules for the standard problems in the real options theory is given in the binomial and trinomial models, and more generally, when the underlying uncertainty is modelled as a random walk...

A general framework for pricing of real options in continuous time for wide classes of payoff streams that are monotone functions of a Levy process is provided. Exercise rules are formulated in terms of statistics of record-setting low payoffs and can be viewed as an extension of Bernanke's bad...

We explicitly solve the pricing problem for perpetual American puts and calls, and provide an efficient semi-explicit pricing procedure for options with finite time horizon. Contrary to the standard approach, which uses the price process as a primitive, we model the price process as the expected...

Continuous time models in the theory of real options give explicit formulas for optimal exercise strategies when options are simple and the price of an underlying asset follows a geometric Brownian motion. This paper suggests a general, computationally simple approach to real options in discrete...