An Arbitrage-Free Approach to Quasi-Option Value

Coggins, Jay S.; Ramezani, Cyrus A.

doi:10.1006/jeem.1998.1024

Cited by 15 publications

(9 citation statements)

References 28 publications

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“…For example, an optimal decision concerning a project may often be to wait until new information is obtained or better economic conditions occur; but this benefit of delaying construction now is ignored in most project analyses [U.S. Water Resources Council (USWRC), 1983]. The value of the option of waiting (or "quasi-option value" [Coggins and Ramezani, 1998]) should be added to the net benefits of the "do nothing" alternative [Brealey and Myers, 1992] and can often change the decision. This paper presents an application of the new theory of investment to a proposal to construct a control structure at the outlet of Lake Erie, one of the LaurentJan Great Lakes of North America.…”

Section: Introductionmentioning

confidence: 99%

Analyzing investments for managing Lake Erie levels under climate change uncertainty

Venkatesh¹,

Hobbs²

1999

Water Resources Research

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Abstract. Analyses of investments that are irreversible and have uncertain benefits should consider the option of delaying a decision. For instance, the benefits of many water resource projects could change if global warming occurs. The magnitude of that warming is uncertain, and delaying projects until more information is available might be optimal.We examine whether this is true for construction of an outflow control structure for Lake Erie. Using Bayesian Monte Carlo (BMC)-based decision analysis, we find that considering climate uncertainty does make a difference. Climate change beliefs, in the form of prior distributions over transient climate scenarios, can affect the optimal strategy: in particular, climate change makes delaying construction more attractive. The option value of deferring the decision to build is as high as $20 million. Ignoring the possibility of climate warming can inflict an expected penalty as large as 20% of the cost of the control structure. We also compare climate risks to uncertainties in stage-damage curves and find that they are approximately of equal importance.

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Section: Introductionmentioning

confidence: 99%

Analyzing investments for managing Lake Erie levels under climate change uncertainty

Venkatesh¹,

Hobbs²

1999

Water Resources Research

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“…Quasi-Option Value" [4] Coggins and Ramezani define 'quasi-option value' they define a concept that differs from the 'quasi-option value' as it was defined and analyzed by Fisher and Hanemann [7,8]. This means they re-interpreted the concept of quasi-option value that was introduced by Arrow and Fisher [1].…”

Section: Discussionmentioning

confidence: 99%

“…Lund [10] [4] interpreted quasi-option value as a financial option using an arbitrage-free ('contingent claims') valuation approach in the standard binomial model [5].…”

Section: Introductionmentioning

confidence: 99%

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A Comment on 'An Arbitrage-Free Approach to Quasi-Option Value' by Coggins and Ramezani

Mensink¹

2004

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu I would like to stress that the persons I thank do not necessarily agree with all claims made in this comment. Part of the research was done at the University of Kiel, Germany; support by the German Terms of use: Documents inResearch Council (DFG) is gratefully acknowledged. † Independent. Zeye

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“…As in most of the land allocation literature, see Clarke and Reed (1990); Scheinkman and Zariphopulou (2001) and Coggins and Ramezani (1998), we assume that revenues accruing from the three states can be approximated by geometric Brownian motions with drift as…”

Section: The Stochastic Programming Problemmentioning

confidence: 99%

Integrating stochastic programming and decision tree techniques in land conversion problems

Messina

Bosetti

2006

Ann Oper Res

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This paper is concerned with gradual land conversion problems, placing the main focus on the interaction between time and uncertainty. This aspect is extremely relevant since most decisions made in the field of natural resources and sustainable development are irreversible decisions. In particular, we discuss and develop a scenario-based multi-stage stochastic programming model in order to determine the optimal land portfolio in time, given uncertainty affecting the market. The approach is then integrated in a decision tree framework in order to account for domain specific (environmental) uncertainty that, diversely from market uncertainty, may depend on the decision taken. Although, the designed methodology has many general applications, in the present work we focus on a particular case study, concerning a semi-degraded natural park located in northern Italy. Keywords Stochastic programming . Decision analysis . Land management IntroductionWe examine the effects of uncertainty and irreversibility in valuing and timing conversion and development projects involving land areas or natural resources. This topic has been addressed first by Arrow and Fisher (1974) and Henry (1974), who treat the complete conversion problem as an optimal stopping problem, while the gradual conversion problem was first introduced by Clarke and Reed (1990). Our analysis is focused on a more general problem, that is finding an optimal land/resources portfolio composition through time, in the presence of future market uncertainty. In fact, it is often more realistic to assume that an optimal land management program will involve a gradual sequence of conversion decisions through time, evolving as each land allocation/resource value becomes known more accurately.

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An Arbitrage-Free Approach to Quasi-Option Value

Cited by 15 publications

References 28 publications

Analyzing investments for managing Lake Erie levels under climate change uncertainty

Analyzing investments for managing Lake Erie levels under climate change uncertainty

A Comment on 'An Arbitrage-Free Approach to Quasi-Option Value' by Coggins and Ramezani

Integrating stochastic programming and decision tree techniques in land conversion problems

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