Maier, S;
Pflug, GC;
Polak, JW;
(2020)
Valuing portfolios of interdependent real options under exogenous and endogenous uncertainties.
European Journal of Operational Research
, 285
(1)
pp. 133-147.
10.1016/j.ejor.2019.01.055.
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Abstract
Although the value of portfolios of real options is often affected by both exogenous and endogenous sources of uncertainty, most existing valuation approaches consider only the former and neglect the latter. In this paper, we introduce an approach for valuing portfolios of interdependent real options under both types of uncertainty. In particular, we study a large portfolio of options (deferment, staging, mothballing, abandonment) under conditions of four underlying uncertainties. Two of the uncertainties, decision-dependent cost to completion and state-dependent salvage value, are endogenous, the other two, operating revenues and their growth rate, are exogenous. Assuming that endogenous uncertainties can be exogenised, we formulate the valuation problem as a discrete stochastic dynamic program. To approximate the value of this optimisation problem, we apply a simulation-and-regression-based approach and present an efficient valuation algorithm. The key feature of our algorithm is that it exploits the problem structure to explicitly account for reachability – that is the sample paths in which resource states can be reached. The applicability of the approach is illustrated by valuing an urban infrastructure investment. We conduct a reachability analysis and show that the presence of the decision-dependent uncertainty has adverse computational effects as it increases algorithmic complexity and reduces simulation efficiency. We investigate the way in which the value of the portfolio and its individual options are affected by the initial operating revenues, and by the degrees of exogenous and endogenous uncertainty. The results demonstrate that ignoring endogenous, decision- and state-dependent uncertainty can lead to substantial over- and under-valuation, respectively.
| Type: | Article |
|---|---|
| Title: | Valuing portfolios of interdependent real options under exogenous and endogenous uncertainties |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1016/j.ejor.2019.01.055 |
| Publisher version: | https://doi.org/10.1016/j.ejor.2019.01.055 |
| Language: | English |
| Additional information: | This work is licensed under a Creative Commons Attribution 4.0 International License. The images or other third party material in this article are included in the Creative Commons license, unless indicated otherwise in the credit line; if the material is not included under the Creative Commons license, users will need to obtain permission from the license holder to reproduce the material. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/ |
| Keywords: | Stochastic optimisation, Stochastic processes, Real options portfolio, Endogenous uncertainty, Decision/state-dependent uncertainty |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Statistical Science |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10107536 |
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