Investment under uncertainty Dixit, Robert K; Pindyck, Robert S
1994., 20120714, 2012, 1994, 2012-07-14, 19930101
eBook
How should firms decide whether and when to invest in new capital equipment, additions to their workforce, or the development of new products? Why have traditional economic models of investment ...failed to explain the behavior of investment spending in the United States and other countries? In this book, Avinash Dixit and Robert Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made. In so doing, they answer important questions about investment decisions and the behavior of investment spending.
This new approach to investment recognizes the option value of waiting for better (but never complete) information. It exploits an analogy with the theory of options in financial markets, which permits a much richer dynamic framework than was possible with the traditional theory of investment. The authors present the new theory in a clear and systematic way, and consolidate, synthesize, and extend the various strands of research that have come out of the theory. Their book shows the importance of the theory for understanding investment behavior of firms; develops the implications of this theory for industry dynamics and for government policy concerning investment; and shows how the theory can be applied to specific industries and to a wide variety of business problems.
Stocks with large increases in call (put) implied volatilities over the previous month tend to have high (low) future returns. Sorting stocks ranked into decile portfolios by past call implied ...volatilities produces spreads in average returns of approximately 1% per month, and the return differences persist up to six months. The cross section of stock returns also predicts option implied volatilities, with stocks with high past returns tending to have call and put option contracts that exhibit increases in implied volatility over the next month, but with decreasing realized volatility. These predictability patterns are consistent with rational models of informed trading.
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Strategic investment Smit, Han T. J; Trigeorgis, Lenos
2004., 20120112, 2012, 2004, 2012-01-12
eBook
Corporate finance and corporate strategy have long been seen as different sides of the same coin. Though both focus on the same broad problem, investment decision-making, the gap between the two ...sides--and between theory and practice--remains embarrassingly large. This book synthesizes cutting-edge developments in corporate finance and related fields--in particular, real options and game theory--to help bridge this gap. In clear, straightforward exposition and through numerous examples and applications from various industries, Han Smit and Lenos Trigeorgis set forth an extended valuation framework for competitive strategies. The book follows a problem-solving approach that synthesizes ideas from game theory, real options, and strategy. Thinking in terms of options-games can help managers address questions such as: When is it best to invest early to preempt competitive entry, and when to wait? Should a firm compete in R&D or adopt an accommodating stance? How does one value growth options or infrastructure investments? The authors provide a wide range of valuation examples, such as acquisition strategies, R&D investment in high-tech sectors, joint research ventures, product introductions in consumer electronics, infrastructure, and oil exploration investment. Representing a major step beyond standard real options or strategy analysis, and extending the power of real options and strategic thinking in a rigorous fashion, Strategic Investment will be an indispensable guide and resource for corporate managers, MBA students, and academics alike.
Competitive Strategy Chevalier-Roignant, Benoit; Trigeorgis, Lenos; Dixit, Avinash K
12/2011, Volume:
1
eBook, Book
Corporate managers who face both strategic uncertainty and market uncertainty confront a classic trade-off between commitment and flexibility. They can stake a claim by making a large capital ...investment today, influencing their rivals' behavior; or they can take a "wait and see" approach to avoid adverse market consequences tomorrow. In Competitive Strategy, Benoit Chevalier-Roignant and Lenos Trigeorgis describe an emerging paradigm that can quantify and balance commitment and flexibility, "option games," by which the decision-making approaches of real options and game theory can be combined. The authors first discuss prerequisite concepts and tools from basic game theory, industrial organization, and real options analysis, bringing important materials and ideas together into a unified framework. They then present the new approach in discrete time and later in continuous time, beginning with the building blocks of the basic ideas and tools and culminating in richer theoretical analyses. Their presentation of continuous-time option games is the first systematic coverage of the topic and fills a significant gap in the existing literature. Competitive Strategy provides a rigorous yet pragmatic and intuitive approach to strategy formulation. It synthesizes research in the areas of strategy, economics, and finance in a way that is accessible to readers not necessarily expert in the various fields involved. The book will be of interest to scholars, students, and academically trained practicing managers interested in applying these ideas.
We present an efficient method for robustly pricing discretely monitored barrier and occupation time derivatives under exponential Lévy models. This includes ordinary barrier options, as well as ...(resetting) Parisian options, delayed barrier options (also known as cumulative Parisian or Parasian options), fader options and step options (soft-barriers), all with single and double barriers, which have yet to be priced with more general Lévy processes, including KoBoL (CGMY), Merton's jump diffusion and NIG. The method's efficiency is derived in part from the use of frame-projected transition densities, which transform the problem into the Fourier domain and accelerate the convergence of intermediate expectations. Moreover, these expectations are approximated by Toeplitz matrix-vector multiplications, resulting in a fast implementation. We devise an augmentation approach that contributes to the method's robustness, adding protection against mis-specifying a proper truncation support of the transition density. Theoretical convergence is verified by a series of numerical experiments which demonstrate the method's efficiency and accuracy.
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The shape of the volatility smirk has significant cross-sectional predictive power for future equity returns. Stocks exhibiting the steepest smirks in their traded options underperform stocks with ...the least pronounced volatility smirks in their options by 10.9% per year on a risk-adjusted basis. This predictability persists for at least 6 months, and firms with the steepest volatility smirks are those experiencing the worst earnings shocks in the following quarter. The results are consistent with the notion that informed traders with negative news prefer to trade out-of-the-money put options, and that the equity market is slow in incorporating the information embedded in volatility smirks.
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7.
Stock Options as Lotteries BOYER, BRIAN H.; VORKINK, KEITH
The Journal of finance (New York),
August 2014, Volume:
69, Issue:
4
Journal Article
Peer reviewed
We investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness ...and average returns, in contrast to the traditional view that only coskewness is priced. We find, consistent with recent theory, that total skewness exhibits a strong negative relationship with average option returns. Differences in average returns for option portfolios sorted on ex ante skewness range from 10% to 50% per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgeable risk when accommodating investor demand for lottery-like options.
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Commodity Option Pricing: A Practitioner's Guide covers commodity option pricing for quantitative analysts, traders or structurers in banks, hedge funds and commodity trading companies. Based on the ...author's industry experience with commodity derivatives, this book provides a thorough and mathematical introduction to the various market conventions and models used in commodity option pricing. It introduces the various derivative products typically traded for commodities and describes how these models can be calibrated and used for pricing and risk management. The book has been developed with input from traders and examples using real world data, together with relevant up to date academic research. The book includes practical descriptions of market conventions and quote codes used in commodity markets alongside typical products seen in broker quotes and used in calibration. Also discussed are commodity models and their mathematical derivation and volatility surface modelling for traded commodity derivatives. Gold, silver and other precious metals are addressed, including gold forward and gold lease rates, as well as copper, aluminium and other base metals, crude oil and natural gas, refined energy and electricity. There are also sections on the products encountered in commodities such as crack spread and spark spread options and alternative commodities such as carbon emissions, weather derivatives, bandwidth and telecommunications trading, plastics and freight. Commodity Option Pricing is ideal for anyone working in commodities or aiming to make the transition into the area, as well as academics needing to familiarize themselves with the industry conventions of the commodity markets.
Recent evidence shows that option volatility skews and volatility spreads between call and put options predict equity returns. This study investigates whether such predictive ability is driven by ...option traders' information advantage.We examine the predictive ability of volatility skews and volatility spreads around significant information events including earnings announcements, other firm-specific information events, and events that trigger significant market reactions. Consistent with option traders having an information advantage relative to equity traders before information events, we find that the option measures immediately before these events have higher predictive ability for short-term event returns than they do in a more dated window or before a randomly selected pseudo-event. We also find that option measures have predictive ability after information events. However, this predictive ability holds only for unscheduled corporate announcements, which suggests that, relative to equity traders, option traders have superior ability to process less anticipated information.
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This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and ...find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40% as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.
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