The pricing of real options in discrete time models: Another story of the value of waiting to invest

Abstract

This paper proposes a discrete time real options model with time‐dependent and serial correlated return process for a real estate development problem with waiting options. Based on a Martingale condition, the paper claims to be able to relax many unrealistic assumptions made in the typical real option pricing methodology. Our real option model is a new one without assuming the return process as “Ito Process”, specifically, without assuming a geometric Brownian motion. We apply the model to the condominium market in Tokyo metropolitan area in the period 1971‐1997 and estimate the value of waiting to invest in 1998‐2007. The results partly provide realistic estimates of the parameters and show the applicability of our model.

Citation

Kawaguchi, Y. and Tsubokawa, K. (2001), "The pricing of real options in discrete time models: Another story of the value of waiting to invest", Journal of Property Investment & Finance, Vol. 19 No. 1, pp. 9-34. https://doi.org/10.1108/14635780110365334