The real options approach is used to explain discounted utility anomalies as artifacts of the optimizing behavior of an individual with standard preferences, who perceives the utility from consumption in the future as uncertain. For this individual,waiting is valuable because uncertainty is...

We explain essentially all known discounted utility anomalies as artefacts of the optimizing behavior of an individual with a time-separable utility function, who perceives a good as a source of a stochastic consumption stream, and believes that she can wait for an optimal moment to buy or sell...

We suggest a simple reduction of pricing European options in affine jump-diffusion models to pricing options with modified payoffs in diffusion models. The procedure is based on the conjugation of the infinitesimal generator of the model with an operator of the form $e^{i\Phi(-\sqrt{-1}\dd_x)}$...

This paper provides a general framework for pricing of real options in continuous time for wide classes of payoff streams that are functions of Levy processes. As applications, we calculate the option values of multi-stage investment/disinvestment problems (sequences of embedded options, which...

We calculate optimal exercise boundaries and rational prices for perpetual American call and put options, and solve entry and exit problems when the underlying uncertainty is modelled as an exponential Ornstein-Uhlenbeck process. The solution is almost as simple as in the case of an exponential...

This paper is an extended version of the paper quot;Practical Guideto Real Options in Discrete Timequot; (http://ssrn.com/abstract=510324), where a general, computationally simple approach to real options in discrete time was suggested. We explicitly formulate conditions of the general theorems...

We show that three classes of multi-factor gaussian mean-reverting models: for the dynamics of the (log-)price of a stock, ATSM of the Ornstein-Uhlenbeck type, and QTSM are equivalent, when contingent claims with deterministic life-spans are considered. We provide the reduction of these models...

Sufficient conditions for the application of the Feynman-Kac formula for option pricing for wide classes of affine term structure models in the jump-diffusion case are derived generalizing earlier results for bond pricing in the pure diffusion case

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 the underlying asset follows a geometric Brownian motion. This paper suggests a general, computationally simple approach to real options in...