Title
Impact of probability distributions on real options valuation Impact of probability distributions on real options valuation
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
New York ,
Subject
Economics
Source (journal)
Journal of infrastructure systems / American Society of Civil Engineers. - New York
Volume/pages
22(2016) :3 , 13 p.
ISSN
1076-0342
1076-0342
Article Reference
04016005
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
This paper shows that the choice of the type of probability distribution is crucial in Real Options Analysis, because it could lead to different outcomes. This is illustrated by using the beta distribution and its special cases, such as the Program Evaluation and Review Technique (PERT) and uniform distribution to model parking garage demand uncertainty. These distributions are commonly used when there are no data available about the stochastic variable, i.e., demand uncertainty. Beta distributions are more flexible than the PERT and uniform distribution. One of the major challenges is the practicality of the beta distribution. A good solution to this challenge is provided by the PERT distribution, because of its ease-of-use and greater flexibility than the uniform distribution. In this research, a parking garage case example is used as the base case for modeling of the parking garage demand and is refined to allow for more generic, flexible, and practical applications of the model. The impact of different probability distributions is studied on the basis of an expansion option.
Full text (open access)
https://repository.uantwerpen.be/docman/irua/01c60a/131910.pdf
Handle