Pricing Real Options under the CEV Diffusion

摘要: Much of the work on real options assumes that underlying state variable follows a geometric Brownian motion with constant volatility. This paper uses more general assumption for process which may better capture empirical observations found in financial economics literature. We use so-called elasticity variance (CEV) diffusion model where volatility is function asset price and provide analytical solutions perpetual American-style call put under CEV diffusion. When risk-free interest rate r different from dividend yield q, American option based an infinite series terms involving confluent hypergeometric functions. For = computation formula involves modified Bessel demonstrate implications correct specification valuation assets show firm standard exposed to significant errors analysis lead non-optimal investment disinvestment decisions.