This document describes ongoingwork to be performed on a research project during the period 16 September 2002 through 15 September 2003. In subsequent sections we provide background information for the project taken from the research proposal and present some ideas that were sent recently in a progress report to the providers of the research funds. The goals of this research project are: (1) to...

Mitigation and adaptation represent two solutions to the issue of global warming. While mitigation aims at reducing CO2 emissions and preventing climate change, adaptation encompasses a broad scope of techniques used to reduce the impacts of climate change once they have occurred. Both have direct costs on a country’s Gross Domestic Product, but costs also arise from temperature increases due t...

1 INTRODUCTION Economics-Driven Software Engineering Research (EDSER) seeks to develop technical theories, guidelines, and practices of software development based on sound, established, and new models of value-creation, adapted to the domain of software development as necessary [1, 2]. Most advances in software engineering have not been based upon generally accepted ways of thinking about econo...

We present a theory of option pricing and hedging, designed to address non-perfect arbitrage, market friction and the presence of ‘fat’ tails. An implied volatility ‘smile’ is predicted. We give precise estimates of the residual risk associated with optimal (but imperfect) hedging. Accepted for publication in Risk Magazine (December 1995).

This paper provides evidence that the positive relation between firm-level stock returns and firm-level return volatility is due to real options that firms possess. Consistent with the theoretical prediction that the value of a real option should be increasing in the volatility of the underlying asset, we find that the positive volatility-return relation is much stronger for firms that are more...

This paper investigates firm values and investment strategies (investment, coupon, and default timing) when several firms make strategic real investments with debt financing. We derive and compare the equilibrium investment strategies in three types of duopoly: (i) two symmetric firms, both of which can issue debt, (ii) two symmetric firms, only one of which (the leader) can issue debt, and (ii...

B et al. (2005) describe an approach for using traditional decision analysis tools to solve real-option valuation problems. Their approach calls for a mix of discounted cash flow analysis and risk-neutral valuation methods and is implemented using Monte Carlo simulation and binomial decision trees. In this note, I critique their approach and discuss some alternative approaches for solving these...

M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y S U M M E R 2 0 0 8 , V O L . 9 , N O . 4 T he process of evaluating the desirability of long-term investment proposals is referred to as “capital budgeting.” Making optimum capital budgeting decisions (e.g., whether to accept or reject a proposed project), often requires recognizing and correctly accounting for flexibilities associated ...

Electricity prices are notoriously hard to model due to their exotic behav-iors. The extraordinarily high volatilities, strong mean reversion, pronouncedcyclical price patterns, and occasional occurrence of price spikes may demandvery complicated models.From the empirical analysis with the Dutch and German electricity mar-ket data, we …nd that the two-state regime switching ...

This paper provides a new approach for valuing a wide set of capital budgeting problems with many embedded real options dependent on many state variables and a related valuation algorithm based on Monte Carlo simulation. The valuation approach decomposes of a complex real option problem with many options into a set of simple options, but taking into account deviations from value additivity due ...