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Discussion Papers In Economics And Business. 2019, 19-01, p. 1-34

Real options with illiquidity of exercise opportunities

Nishihara, Michi

Graduate School of Economics, Osaka University

英語

text

2019-03

http://www2.econ.osaka-u.ac.jp/library/global/dp/1901.pdf

This paper presents a framework to study real options with illiquidity of option exercise opportunities. I incorporate a constraint that the investment time is chosen from Poisson arrival times in the standard real option value (ROV) model. I derive the closed-form solution and show that illiquidity decreases the option value of waiting and the investment threshold. I extend the results to a case with different types of projects and show that an inferior project can be undertaken in the presence of illiquidity. I prove that the solution of the illiquid model converges to that of the ROV model for higher liquidity and converges to that of the net present value (NPV) model for lower liquidity. I also show that the solution agrees with the limit of the corresponding regime-switching model. The results fill the gaps in the NPV, ROV, and regime-switching models and reveal the effects of illiquidity on investment decisions.

71323

Real options with illiquidity of exercise opportunities

Nishihara, Michi

Graduate School of Economics, Osaka University

英語

2019-03

Discussion Papers In Economics And Business

19-01

1

34

https://hdl.handle.net/11094/71323

http://www2.econ.osaka-u.ac.jp/library/global/dp/1901.pdf