Abstract
The present article provides a novel framework for analyzing option network problems, which is a general class of compound real option problems with an arbitrary combination of reversible and irreversible decisions. The present framework represents the interdependent structure of decisions by using a directed graph. In this framework, the option network problem is formulated as a singular stochastic control problem, whose optimality condition is then obtained as a dynamical system of generalized linear complementarity problems (GLCPs). This enables us to develop a systematic and efficient numerical method for evaluating the option value and the optimal decision policy.
Original language | English |
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Pages (from-to) | 714-729 |
Number of pages | 16 |
Journal | Journal of Economic Dynamics and Control |
Volume | 35 |
Issue number | 5 |
DOIs | |
Publication status | Published - 2011 May |
Keywords
- Compound real options
- Generalized complementarity problems
- Graph theory
- Managerial flexibility
- Singular stochastic control problems
ASJC Scopus subject areas
- Economics and Econometrics
- Control and Optimization
- Applied Mathematics