Valuation and Information Acquisition Policy for Claims Written on Noisy Real Assets

Financial Management, Vol. 30, Issue 2 Summer 2001

Posted: 9 Nov 2001

See all articles by Paul D. Childs

Paul D. Childs

University of Kentucky

Steven H. Ott

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Abstract

We study contingent claims written on real assets whose values are observed with noise and the acquisition of information to improve irreversible exercise decisions. We determine the conditional expected asset value and show that it can depend on historical observed values. In a noisy setting, claim values are calculated by simply adjusting the asset value and variance inputs and applying standard valuation procedures for pricing European and American options. Noise tends to slow the rate of information arrival, reduce contingent claim value, and provide incentives to purposefully acquire additional information. These incentives are illustrated for the case of secured risky debt. The value of acquired information increases when the option holder is indifferent between exercise alternatives, and decreases as one choice increasingly dominates the other. Opportunities to repeatedly acquire information reduce over- or underinvestment in information.

Suggested Citation

Childs, Paul David and Ott, Steven H. and Riddiough, Timothy J., Valuation and Information Acquisition Policy for Claims Written on Noisy Real Assets. Financial Management, Vol. 30, Issue 2 Summer 2001, Available at SSRN: https://ssrn.com/abstract=275532

Paul David Childs (Contact Author)

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States
606-257-2490 (Phone)
606-257-9688 (Fax)

Steven H. Ott

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law ( email )

9201 University City Blvd.
Charlotte, NC 28223
United States
704-687-2744 (Phone)
704-687-6987 (Fax)

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-3531 (Phone)
608-265-2738 (Fax)

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