Optimal Stopping Made Easy

19 Pages Posted: 29 Oct 2004

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Sergei Levendorskii

Calico Science Consulting

Date Written: October 26, 2004


This paper presents a simple discrete time model for valuing real options. A short and simple proof of optimal exercise rules for the standard problems in the real options theory is given in the binomial and trinomial models, and more generally, when the underlying uncertainty is modelled as a random walk on a lattice. The method of the paper is based on the use of the expected present value operators. With straightforward modifications, the method works in discrete time-continuous space, continuous time-continuous space and continuous time-discrete space models.

Keywords: Real options, random walks on lattices, expected present value operators

JEL Classification: D81, C61, G12, G31

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., Optimal Stopping Made Easy (October 26, 2004). Available at SSRN: https://ssrn.com/abstract=610621 or http://dx.doi.org/10.2139/ssrn.610621

Svetlana I. Boyarchenko (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Sergei Z. Levendorskii

Calico Science Consulting ( email )

Austin, TX
United States

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