A network of options: Evaluating complex interdependent decisions under uncertainty

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

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 languageEnglish
Pages (from-to)714-729
Number of pages16
JournalJournal of Economic Dynamics and Control
Volume35
Issue number5
DOIs
Publication statusPublished - 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

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