(2012), “Financial valuation of investment projects in new technologies with real options”, Contaduría y Administración, Vol. Álvarez Echeverría, F., López Sarabia, P. (2007), “Maximum likelihood estimation of stochastic volatility models”, Journal of Financial Economics, Vol. The main contribution is the formal derivation of a risk-neutral valuation as well as the market risk premium associated with volatility, verifying this condition via numerical test on simulated and real data, showing that our proposal is consistent with Black and Scholes formula and multiplicative binomial trees method.Īı¨t-Sahalia, Y. The originality of this paper lies in try to model the implicit (conditional) market volatility to assess, based on that, a real option using a quadrinomial tree, including into this valuation the stochastic volatility of the underlying asset. Findings showed that in the proposed method with volatility tends to zero, the multiplicative binomial traditional method is a particular case, and results are comparable between these methodologies, as well as to the exact solution offered by the Black–Scholes model. This article uses the multiplicative quadrinomial tree numerical method with non-constant volatility, based on stochastic differential equations of the GARCH-diffusion type to value real options when the volatility is stochastic.įindings. The purpose of this article is to propose a detailed methodology to estimate, model and incorporate the non-constant volatility onto a numerical tree scheme, to evaluate a real option, using a quadrinomial multiplicative recombination.ĭesign/methodology/approach. Real options, Stochastic volatility, Diffusion processes, GARCH-diffusion, Quadrinomial numerical method Abstract Mathematical Sciences, EAFIT University, Medellin, Colombiaįinance, EAFIT University, Medellin, ColombiaĮconomics and Finance, EAFIT University, Medellin, Colombia

Real options valuation in oil and gas