A Real Options Model with Games Applied to the Rio de Janeiro Residential Real Estate Market

Abstract

Purpose -To determine the optimal investment strategy in Nash equilibrium for the residential real estate market of Rio de Janeiro, considering the uncertainty in the demand for real estate and the number of active competitors in the market.Design/methodology/approach -A Real Options Game model was developed. The parameters of the model were estimated with econometric tools using data from the Rio de Janeiro real estate market.Findings -The quantitative results obtained are intuitive in the sense that the larger the number of competitors, the lower the level of demand required for investment in new units, whereas the greater the volatility of demand, the greater the demand threshold for the investment to be optimal.Originality/value -This study modified the methodology of Grenadier (2002), providing a more adequate and robust specification of the uncertainty for the demand function, thus allowing more intuitive economic interpretations.

Value Maximizing Decisions in the Real Estate Market: Real Options Valuation Approach

“…Finally, the real estate investment decisions of firms are, in most cases, taken within a strategic competition with other firms in the industry, where the competitive actions of one company affect the decisions of the others (De Almeida et al 2019). In this vein, having contributed to the literature by bridging three real options valuation approach in the cohesive whole model in the current paper, the future work can provide more robust economic analyses and interpretations regarding the demand for real estate, showing quantitatively how competition can impact strategic decisions (De Almeida et al 2019).…”