The Author shows that modelling the uncertain cash flow dynamics of an investment project deserves careful attention in real options valuation.
Focusing on the case of commodity price uncertainty, a broad empirical study reveals that, contrary to common assumptions, prices are often non-stationary and exhibit non-normally distributed returns.
Subsequently, more realistic stochastic volatility, jump diffusion, and L vy processes are evaluated in the context of a stylised investment project.
The valuation results suggest that stochastic process choice can have substantial implications for valuation results and optimal investment rules.
About the Author Max Sch ne is a Ph.
student at the WHU - Otto Beisheim School of Management with a research focus on real options valuation and decision making under uncertainty.
Springer Gabler Real options valuation: the importance of stochastic process choice in commodity price modelling, paperback/max schone
