Abstract

http://ssrn.com/abstract=1102673
 
 

References (40)



 
 

Citations (5)



 


 



A Bayesian Approach to Real Options: The Case of Distinguishing between Temporary and Permanent Shocks


Steven R. Grenadier


Stanford Graduate School of Business

Andrey Malenko


MIT Sloan School of Management

April 28, 2010

Journal of Finance, Vol. 65, No. 5, pp. 1949-1986
AFA 2009 San Francisco Meetings Paper
EFA 2008 Athens Meetings Paper

Abstract:     
Traditional real options models demonstrate the importance of the "option to wait" due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. Adding Bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional "option to learn." The implied investment behavior differs significantly from that in standard models. For example, investment may occur at a time of stable or decreasing cash flows, respond sluggishly to cash flow shocks, and depend on the timing of project cash flows.

Number of Pages in PDF File: 70

Keywords: irreversible investment, real options, Bayesian updating, learning, temporary and permanent shocks, mean reversion

JEL Classification: D81, D83, G13, G31

Accepted Paper Series


Download This Paper

Date posted: March 6, 2008 ; Last revised: November 21, 2010

Suggested Citation

Grenadier, Steven R. and Malenko, Andrey, A Bayesian Approach to Real Options: The Case of Distinguishing between Temporary and Permanent Shocks (April 28, 2010). Journal of Finance, Vol. 65, No. 5, pp. 1949-1986; AFA 2009 San Francisco Meetings Paper; EFA 2008 Athens Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1102673

Contact Information

Steven R. Grenadier (Contact Author)
Stanford Graduate School of Business ( email )
Graduate School of Business
Stanford, CA 94305-5015
United States
650-725-0706 (Phone)
650-725-6152 (Fax)

Andrey Malenko
MIT Sloan School of Management ( email )
100 Main Street
E62-619
Cambridge, MA 02142
United States
617-225-9301 (Phone)
HOME PAGE: http://www.mit.edu/~amalenko
Feedback to SSRN


Paper statistics
Abstract Views: 2,364
Downloads: 431
Download Rank: 36,744
References:  40
Citations:  5

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.250 seconds