This paper provides a conceptual framework to analyze investment projects with networks externalities. In the presence of such effects, consumers make their choice of consumption according to the number of people having already adopted the product or the service. The process of diffusion of such...

We examine the impact on an R&D valuation and its investment timing of abrupt events, options facing paradise (blockbusters) and purgatory (catastrophes). We show that the presence of a special case of Lévy jumps can model positive and negative effects in the investment opportunity even when...

This paper presents a practical volatility estimation method for cash flow simulation based real option valuation with changing volatility. During cash flow simulation, present value of the future cash flows and their corresponding cash flow state variable values are recorded for all time...

We study a stochastic version of Fudenberg and Tirole's (1985) preemption game to analyze the effects of jumps in the underlying uncertainty on equilibrium strategies. Two firms contemplate entering a new market where the demand follows a jump-diffusion process. Firms differ is the sunk costs of...

Two asymmetric potential entrants contemplate entering a new market. Firms differ in their potential profit flows and investment sunk costs. The market demand follows a geometric Brownian motion. This paper shows that under certain parameter conditions, there will be an equilibrium triggered by...

In "new" new international trade theory, whether firms export or not are determined by their productivity. These models assume that firms enter a market to find their productivity levels revealed to them as in a lottery. In this paper we propose an alternative way to model whether firms export...

A method for handling the problem of financial mission statement has been suggested to evaluate effects of projected upgrading equipment of a manufacturing company. For this end, such project is analyzed as an Asian real option with constant business volatility. The problem is solved using the...

This paper establishes a degree of influence between an inflation rate and a risk-free investment rate on the precision of estimated value of an Asian real option. It has been shown with an example that in the event of advancing by the inflation rate beyond profitability of risk-free...

In relation to creating a CO2 emission permit market, there are two types of climate change policy risks: 1) It is uncertain whether and when a cap-and-trade system will be implemented; and 2) once a policy is in place, there may be government credibility issues. This paper examines the effect of...

R&D is often a highly uncertain venture where experiments achieve successful outcomes on an extraordinarily rare basis. Just one successful product could change the future of a company; the discovery stage can often be an invaluable or disastrous experience. We develop a real R&D option model...