Implementing Real Options Valuation under Macroeconomic Risk and Normally Distributed Cash Flows

Year 2024, Volume: 16 Issue: 1, 50 - 67, 16.09.2024

Norvald Instefjord Turalay Kenç

https://doi.org/10.33818/ier.1476515

Abstract

The paper highlights the encountered problems in implementing real options under
more realistic assumptions such as business cycle risk and normally distributed cash
flows. The problems considered include (i) estimating empirical distribution of cash
flows from real option investments; (ii) investment decisions across business cycles,
and (iii) calculating the probability of investing with the above stated rich features.
To this end, we estimate operating cash flows of US corporate firms using a Markov
chain model under both geometric and arithmetic Brownian motions assumptions for
cash flows and develop a valuation model of real option with normally distributed
cash flows. Associated investment valuation models incorporating these estimates
reveal that critical cash flow levels significantly differ across models and regimes.

Keywords

Macroeconomic Risk, Regime Switching, Real Options, Arithmetic Brownian Motion, Geometric Brownian Motion

Ethical Statement

Bu çalışmanın, özgün bir çalışma olduğunu; çalışmanın hazırlık, veri toplama, analiz ve bilgilerin sunumu olmak üzere tüm aşamalarından bilimsel etik ilke ve kurallarına uygun davrandığımı; bu çalışma kapsamında elde edilmeyen tüm veri ve bilgiler için kaynak gösterdiğimi ve bu kaynaklara kaynakçada yer verdiğimi; kullanılan verilerde herhangi bir değişiklik yapmadığımı, çalışmanın Committee on Publication Ethics (COPE)' in tüm şartlarını ve koşullarını kabul ederek etik görev ve sorumluluklara riayet ettiğimi beyan ederim. Herhangi bir zamanda, çalışmayla ilgili yaptığım bu beyana aykırı bir durumun saptanması durumunda, ortaya çıkacak tüm ahlaki ve hukuki sonuçlara razı olduğumu bildiririm.

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