Real option value and random jumps: application of a simulation model

Alonso-Bonis, Susana; Azofra‐Palenzuela, Valentín; Herrero, Gabriel de la Fuente

doi:10.1080/00036840701335603

Cited by 7 publications

(5 citation statements)

References 34 publications

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“…An increase in subsidy could lead to high-performance costs for the government and prevents the PPP contract from being successfully completed [46]. Over-valuation caused by not taking into account short-term uncertainty may explain unprofitable projects [27]. From the above statistic, we can see that the government subsidy increased about 115% when the mean value of short-term uncertainty increased to 1, compared with the revenue without the short-term uncertainty.…”

Section: Resultsmentioning

confidence: 91%

“…Many papers have concluded that the short-term uncertainty will lead to a value estimation error due to the deviation from the prediction value of the Black-Scholes (BS) model [24][25][26]. According to Bonis, the prediction error is influenced by both the long-term component and short-term component [27]. However, Bonis only considers a zero mean value noise, which does not accord with the practice.…”

Section: Introductionmentioning

confidence: 99%

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Effects of Short-Term Uncertainties on the Revenue Estimation of PPP Sewage Treatment Projects

Liu

Liao

Guo

et al. 2019

Water

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Many sewage treatment facilities in China have been developed and operated using the Public-Private Partnerships (PPP) model. However, a big challenge faced by these PPP projects is that the subsidy requested from the government during the operation is normally higher than what was estimated originally, thus often exceeding the budget that the government can afford. This leads to a high risk of project failure or insufficient operation. This problem is largely caused by the uncertainties exhibited in the existing models, such as the Black-Scholes (BS) model. While being used in the budget estimation, these models cannot sufficiently account for the short-term uncertainty that may be incurred during the operation of projects. In this study, a method to account for this short-term uncertainty has been proposed to improve the BS model. This allows for investigations to address issues related to how the real option value of a government subsidy is affected. A Monte Carlo simulation was performed to take into account the noise in the estimation. A sensitivity analysis further revealed that this discrepancy is largely affected by the values of the relevant parameters in the short-term uncertainty model. We found that the short-term uncertainty has a significant effect on private revenue and government subsidy and that the changes of the latter are more sensitive to the change of short-term uncertainty. The value of the relevant variables of short-term uncertainty determined the fluctuation of the revenue. The mean value and revenue had a positive correlation. The reverting speed and revenue showed a negative correlation. The short-term volatility had a positive correlation toward the fluctuation range of the revenue. The simulation results indicate that this enhanced method can produce more accurate information for a better assessment of the PPP project under a wide range of uncertainty scenarios, allowing for the best decision making by the government.

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Section: Resultsmentioning

confidence: 91%

Section: Introductionmentioning

confidence: 99%

Effects of Short-Term Uncertainties on the Revenue Estimation of PPP Sewage Treatment Projects

Liu

Liao

Guo

et al. 2019

Water

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“…Previous research has focused on the quantitative analysis of risks by using analytic hierarchy process (AHP), Monte Carlo simulation [32], real options method [33], binomial lattice [34], fuzzy set theory [35], etc. in PPP projects.…”

Section: System Dynamics Modelmentioning

confidence: 99%

Evaluating the Impact of Macroeconomic Policy Interventions and Recession on a Sewage Treatment PPP Project Using a System Dynamic Model

Liu

Liao

Guo

et al. 2023

Advances in Civil Engineering

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The revenue of a public-private partnership (PPP) project is influenced by macroeconomic scenarios such as economic recession and policy adjustments. But these macrofactors and their dynamic relations with microfactors in PPP projects have not been thoroughly understood. In this article, system dynamics (SD) and real option (RO) are integrated to develop a novel model to investigate the impacts of the macro-risk factors on the revenue of PPP projects. Five scenarios were studied through simulation. The results indicate that the loan interest rate and tax rate are negatively correlated to the revenue, while the GDP growth rate and self-owned capital rate are positively correlated. This indicates that the government can stimulate the private sector to invest in PPP projects by providing lower loan interest and increasing the self-owned capital rate. This integrated approach has been proposed for use by decision-makers to evaluate the impact of economics and policies in the future. This study provides a comprehensive review and reliable theoretical analysis regarding the adoption of PPP by China’s local governments, yielding to main policy implications for further promoting the efficiency of PPP development.

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“…An important point to mention is that business risks are always present, i.e., the operating profits of the firms are subject to fluctuations and vicissitudes in production, marketing, and personal life with or without agroparks. The consequences of these fluctuations and random jumps can be modeled using stochastic methods such as the Monte Carlo simulation, which is widely used in the calculation of business risks (see, e.g., Alonso‐Bonis, Azofra‐Palenzuela, & de la Fuente‐Herrero, 2009; Tziralis, Kirytopoulos, Rentizelas, & Tatsiopoulos, 2009). In short, Monte Carlo simulation relies on repeated random sampling of risk variables (e.g., prices of production inputs and outputs, occurrence of disease) to compute the variability in the results of interest (e.g., operating profit, CO 2 emission).…”

Section: Analyzing the Synergy And Risk Of Agroparksmentioning

confidence: 99%

The nature of agroparks: synergy versus risk

Galen

Asseldonk

et al. 2011

Agribusiness

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An ideal agropark is envisaged as a planned agribusiness system in which all activities are geared towards sustainable development based on the principles of industrial ecology. The agropark concept offers in theory a variety of economic advantages as well as environmental benefits. The implementation of the concept, however, has encountered many challenges. This paper introduced an analytical framework for evaluating the synergy and risk of agroparks. The analysis brought into prominence the impact of institutional arrangements on the success or failure of agropark formation. An overview of the risks related to the agropark concept was provided. It was concluded that the key to successful formation and operation of the an agropark is the choice of proper institutional arrangements that create high incentives to cooperate and incur low institution cost. © 2011 Wiley Periodicals, Inc.

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Real option value and random jumps: application of a simulation model

Cited by 7 publications

References 34 publications

Effects of Short-Term Uncertainties on the Revenue Estimation of PPP Sewage Treatment Projects

Effects of Short-Term Uncertainties on the Revenue Estimation of PPP Sewage Treatment Projects

Evaluating the Impact of Macroeconomic Policy Interventions and Recession on a Sewage Treatment PPP Project Using a System Dynamic Model

The nature of agroparks: synergy versus risk

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