Real (investment) options with multiple sources of rare events

Martzoukos, Spiros H.; Trigeorgis, Lenos

doi:10.1016/s0377-2217(01)00075-3

Cited by 73 publications

(50 citation statements)

References 30 publications

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“…The uncertainty in generation costs is derived from the uncertainty in the prices of fuels consumed by the generating units. The stochastic dynamics of fuel prices is modeled by a mean reversion process with Poisson jumps (Martzoukos and Trigeorgis, 2002). As it is customary in reliability studies, the uncertainty on the operating state of system components is modeled as a two-state (OperationFailure) Markov process (Billinton and Allan, 1996), which entails that residence time of system components in both states are exponentially distributed.…”

Section: < Figure 1 Around Here >mentioning

confidence: 99%

Designing regulatory frameworks for merchant transmission investments by real options analysis

Pringles¹,

Olsina²,

Garcés³

2014

Energy Policy

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In deregulated electricity markets, the transmission network is a key infrastructure for enabling competition in the generation sector. A deficient expansion of the transmission grid prevents the realization of the benefits in terms of efficiency associated with market mechanisms. Consequently, it is essential to provide clear investment policies and economic signals to attract timely and efficient transmission investments in order to develop the system at minimum cost meeting the requirements of generators and consumers, while keeping adequate levels of service quality and reliability. This paper proposes a modern tool of economic evaluation based on Real Options Analysis that provides the regulator the ability to assess various incentives that would lead transmission investors to make efficient decisions in highly uncertain environments. Real Options properly values partially irreversible investment decisions, such as to defer, modify or abandon an investment project in response to the arrival of new information or as uncertainties are resolved. Decisions are evaluated from the point of view of a transmission investor trying to maximize its own profits in the time period set to recover the capital invested. The results allow the study of the behavior of transmission investors regarding their decision making when they have the possibility to manage the option to defer, under different regulatory schemes that encourage the expansion of the transmission system.

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Section: < Figure 1 Around Here >mentioning

confidence: 99%

Designing regulatory frameworks for merchant transmission investments by real options analysis

Pringles¹,

Olsina²,

Garcés³

2014

Energy Policy

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“…The tree lattices, e.g., traditional binomial tree, assume that the underlying process has two possible outcomes at each stage. In contrast with the binomial tree lattice, the grid lattices (see Amin [1993], Gandhi-Hunt [1997], Martzoukos-Trigeorgis [2002], Hagan [2005], and Das [2011]) shown in Exhibit 1, which permit the underlying process to change by multiple states, are built in a rectangular finite difference grid (not to be confused with finite difference numerical methods for solving partial differential equations). The grid lattices are more realistic and convenient for the implementation of a Markov chain solution.…”

Section: The Lattice Procedures In the Lmmmentioning

confidence: 99%

An Efficient Lattice Algorithm for the LIBOR Market Model

Xiao¹

2011

JOD

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“…Similarly, but for perpetual investment options, Dixit and Pindyck (1994) model competitors arrivals as exogenous Poisson events. Martzoukos (2002) extends the approach to capture multiple sources of exogenous events with random effects.…”

Section: Introductionmentioning

confidence: 99%

Investment decisions in finite-lived monopolies

Pereira

Rodrigues

2014

Journal of Economic Dynamics and Control

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This paper studies the value and optimal timing for investment in a finite-lived monopoly. We extend the literature on option games by considering the cases of random and certain-lived monopolies. When compared to the duopoly and monopoly market structures, these new settings produce significantly different results. A certainlived monopoly induces investment sooner than the duopoly, if the initial firm in the market faces the risk of being preempted and, on the contrary, can deter investment more than in monopoly case if the leader role is pre-assigned. A random-lived monopoly induces entry somewhere between the duopoly and monopoly cases. A higher uncertainty deters investment in all cases.

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Real (investment) options with multiple sources of rare events

Cited by 73 publications

References 30 publications

Designing regulatory frameworks for merchant transmission investments by real options analysis

Designing regulatory frameworks for merchant transmission investments by real options analysis

An Efficient Lattice Algorithm for the LIBOR Market Model

Investment decisions in finite-lived monopolies

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