Misvaluation of Investment Options

61 Pages Posted: 9 Aug 2016 Last revised: 3 Aug 2018

Evgeny Lyandres

Boston University

Egor Matveyev

Massachusetts Institute of Technology (MIT) - Sloan School of Management; University of Alberta - Department of Finance and Statistical Analysis

Alexei Zhdanov

Pennsylvania State University

Date Written: August 1, 2018

Abstract

We study whether investment options are correctly priced. We build a real options model of optimal investment under uncertainty and structurally estimate it to classify stocks into undervalued and overvalued based on the difference between observed and model-implied firm values. A long-short strategy that buys most undervalued and shorts most overvalued stocks generates annualized alphas ranging from 10% to 17%. This relation is only present in subsamples of growth firms. We use a range of tests to determine whether this return differential is due to mispricing or a unique growth options risk.

Keywords: Misvaluation, Investment Options, Optimal Investment, Demand Uncertainty, Future Returns, Structural Estimation

JEL Classification: G14, G32

Suggested Citation

Lyandres, Evgeny and Matveyev, Egor and Zhdanov, Alexei, Misvaluation of Investment Options (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=2819652 or http://dx.doi.org/10.2139/ssrn.2819652

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

Egor Matveyev

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-633
Cambridge, MA 02142
United States

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32B Business Building
Edmonton, Alberta T6G 2R6
Canada

Alexei Zhdanov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

Register to save articles to
your library

Register

Paper statistics

Downloads
204
rank
137,001
Abstract Views
814
PlumX